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Dynamic interactions between stock markets and the real economy

Dynamic interactions between stock markets and the real economy PurposeThe purpose of this paper is to re-examine the relationship between a country’s aggregate stock market and general economic development for 14 emerging economies for the period from 1995 to 2014.Design/methodology/approachThe methodological approach of the paper is multifold. First, the authors use cointegration analysis to determine the simple dynamics among the variables. Second, the authors utilize vector autoregression analysis to study the dynamics among the variables for the 14 countries. Third, the authors employ panel analysis to determine common variations among the variables and across countries.FindingsWhen examining the linkage between the stock market and economic development, proxied by gross domestic product growth or with gross fixed capital formation growth, the authors did not find a meaningful relationship between them. However, when the authors included additional control variables strong, dynamic interactions between the two magnitudes surfaced. Specifically, it was found that the stock market is positively and robustly correlated with contemporaneous and future real economic development and, thus, it directly contributed to a country’s economic development either through the production of goods and services or the accumulation of real capital. Thus, it can be inferred that the stock market alone is not capable of boosting economic development in these countries unless being part of a comprehensive financial system (which includes banks) as well as investment in real capital.Research limitations/implicationsThe policy implications are clear. Government authorities must recognize that the stock market alone is not a driver of economic development and that a sound, efficient financial system (which includes banks) must be present in order to contribute and foster economic development.Originality/valueThe study is original in the sense that it examines various financial and economic variables to determine the degree of (or dynamic interactions among) the stock market and the real economy for each and all emerging markets in the sample. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png International Journal of Emerging Markets Emerald Publishing

Dynamic interactions between stock markets and the real economy

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References (55)

Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1746-8809
DOI
10.1108/IJoEM-12-2015-0253
Publisher site
See Article on Publisher Site

Abstract

PurposeThe purpose of this paper is to re-examine the relationship between a country’s aggregate stock market and general economic development for 14 emerging economies for the period from 1995 to 2014.Design/methodology/approachThe methodological approach of the paper is multifold. First, the authors use cointegration analysis to determine the simple dynamics among the variables. Second, the authors utilize vector autoregression analysis to study the dynamics among the variables for the 14 countries. Third, the authors employ panel analysis to determine common variations among the variables and across countries.FindingsWhen examining the linkage between the stock market and economic development, proxied by gross domestic product growth or with gross fixed capital formation growth, the authors did not find a meaningful relationship between them. However, when the authors included additional control variables strong, dynamic interactions between the two magnitudes surfaced. Specifically, it was found that the stock market is positively and robustly correlated with contemporaneous and future real economic development and, thus, it directly contributed to a country’s economic development either through the production of goods and services or the accumulation of real capital. Thus, it can be inferred that the stock market alone is not capable of boosting economic development in these countries unless being part of a comprehensive financial system (which includes banks) as well as investment in real capital.Research limitations/implicationsThe policy implications are clear. Government authorities must recognize that the stock market alone is not a driver of economic development and that a sound, efficient financial system (which includes banks) must be present in order to contribute and foster economic development.Originality/valueThe study is original in the sense that it examines various financial and economic variables to determine the degree of (or dynamic interactions among) the stock market and the real economy for each and all emerging markets in the sample.

Journal

International Journal of Emerging Markets – Emerald Publishing

Published: Sep 19, 2016

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