On the other hand, stock market development is the catalyst for economic growth. The purpose of this study examines the relationship between stock market development and economic Growth.
Empirically, based on the data for Emerging market and developed market countries during the 10 years' period, from - using the generalized method of moments GMM for dynamic panel method approach. To control for the country specific effect, the model is further estimated for the developed and emerging member countries.
The relationship between stock market development and economic growth has received a great deal of attention during the last decades. Many economists have underlined the importance of stock market development in the process of economic growth while others think that this importance is over-stressed.
Managers and owners of businesses are often ignorant of the full range of sources of finance available to them as well as the best means of accessing these funds. As businesses expand, it is pertinent to the continuing success of such a business that it possesses the ability to identify its financing requirements and its sources.
Of all the sources of funds, the stock market is by far the largest source of finance for any organization and the study is needed to extensively focus on the opportunities that bound in the Nigeria stock market with regards to the process of the capital formation. This study examine the stock market development with relationship between economic growths in Nigeria. Development of financial sector is one of the major economic policies since financial development influences economic growth and reduces poverty.
Economic literature over the years has established that a sophisticated stock market is a critical factor for long-run economic growth. Given the importance of stock market for developing countries, this study empirically examines the relationship between stock market development and economic growth using the time-series for India over the period Second, the study also statistically detects the direction of causality cause and effect relationship in a multivariate setting between stock market development and economic growth, which is vital for policy implication.
This study provides important channels of stock market-growth linkages which is important for developing countries like India.
The report went further to suggest that some countries such as South Africa, have large bases of financial sector and larger assets under management, but their economic growth rates are slower, such that chances are high that they will be overtaken by those countries such as Ghana with smaller stock markets, but faster growing economies.
Stock market index In addition to the above, the Africa Asset Management Report suggested that, the Stock market index is a powerful tool in the analysis of returns on investments and also an indicator of stock market volatility. Therefore, countries with higher stock market index such as South Africa are likely to develop faster in terms of their stock markets as compared to those on the lower side. Quality of Institutions According to Asset Management Report , the quality of institutions is another important metric for stock market development.
The report suggested that the strength of the institutional frameworks, including legal frameworks, infrastructural systems and business sophistication determines the rate at which stock markets develop due to the information that these send out to the investing community, thereby building or destroying investor confidence.
Below is therefore a specific case study of South Africa, to explore the behaviour of stock markets and the drivers of the same against stock market variables stated. This paper therefore, details the background literature on the behaviour of stock markets in South Africa and the drivers of it.
The regression analysis model was used to analyse data obtained and justification for the metrics used to assess each stock market variable follows the literature review, which then is followed by an assessment of results. Conclusions and policy implications are given at the end of the paper. Over and above that, South Africa has the largest stock exchange market in the form of the Johannesburg Stock Exchange JSE whose market capitalisation is by far the largest in Africa.
According to this report, by , South Africa had 5 pension funds of which 3 were privately administered, recording an appreciation in value of CAGR However, the Government Employees Pension Fund GEPF is by far the largest in the country accounting for half of the pension funds assets in the country. It is quite clear from the above that the development of the stock market in South Africa, specifically the JSE, has been partly influenced by the rise in the number of pension funds in the country, as evidenced by the growth of the JSE in the same period from to as depicted by the graph below.
Likewise, the growth in the number of pension funds grew from 2 to 3 in the same period The growth in market capitalisation can clearly be attributed partly to the increase in the number of pension funds and the assets thereof. This therefore magnifies the significance of pension funds on stock market behaviours since the rise in the number of pension funds and their collective activity has an influence on the stock market as depicted by the South African market. This clearly shows the significance of pension funds on stock market development in South Africa.
In the case of South Africa, it is quite clear that as the number of pension funds increased in the economy, the size of the pension fund also increased in response, at a disproportionate rate though, due to other economic variables affecting the development of pension funds such as governance quality and banking sector development.
This therefore, leads us to the conclusion that pension fund size as measured by the value of pension fund assets as a proportion of the GDP, has a positive impact on stock market behaviour and development, particularly looking at the South African case.
The table below shows the value of pension funds assets for 12 selected African countries, studied between and Moreover, it is quite clear in the case of South Africa that the larger the value of pension assets, the more developed the market is.
Thus there is a positive relationship, according to economic theory, between pension asset value and the size of the stock market, which then implies that an increase in the number of pension funds and the value of assets thereof will most likely generate an increase in the value of the stock market ceteris paribus. On those six companies, Pension funds have invested From an analytical perspective, it may therefore imply that Pension funds control the life insurance industry in the South African Stock Exchange market judging by this investment magnitude.
The growth of the industry as explored in the following paragraphs can be attributable to the influence of Pension funds in South Africa, reflecting a great impact on the behaviour of the stock market in that country. According to the Africa asset Management Report , Pension funds have invested This policy shift has opened the doors for investment to foreigners as they see it very appealing, leading to the current buoyancy in market capitalisation as a percentage of the GDP as highlighted before on the JSE.
The figure below, extracted from the Africa Stock Exchange Association Report , illustrates this point emphasising the fact that market capitalisation of the JSE has been growing despite the decreasing number of listed companies on the same market. This reflects the high quality levels of investments by the fewer remaining companies on the JSE that include these foreign domiciled investments distributed in South Africa.
Therefore, it can be concluded that the FCISs have considerable impact on the behaviour of stock market in South Africa due to the openness of the market to foreign domiciled investors, that is; less barriers to market entry. However, expressing this figure as a percentage of market capitalisation of USD Anyway, while 2. The bar graph below shows a picture of how FCISs have been growing since when government deliberated that foreign domiciled investors be treated as locals on the Exchange.
Therefore, in real terms, it can be argued that the pace at which FCISs are growing have a significant driving impetus on the stock exchange market in South Africa judging by the dollar numbers gained.
Changes to regulations regarding pension funds in particular could have a big impact on the asset management industry, as public pensions are often the largest institutional investors in many African countries. These changes include allowing pension funds to invest in a wider range of assets or the establishment of a three tier pension system in those markets where there is demand. This could alter the landscape considerably, according to the Africa Asset Management Report The Africa Asset Management Report went on to suggest that Regulatory quality is likely to become a deciding factor in the effective implementation of mobile banking, such that those countries with well equipped regulatory frameworks are likely to benefit more from the expected mobile banking upsurge.
In addition to that, the Africa Asset Management Report also indicated that a new legislation to cater for hedge funds will be put in place and this is expected to attract more than 4 billion US dollars to the Collective Investments Schemes CIS industry which, according to that regulation, hedge funds now fall under CIS. According to World Bank Governance Indicators reports and the Africa Asset Management Report , South Africa scores highly as compared to other African countries indicating its appeal for investors.
Therefore, the inference of this study was that economic growth has a positive effect on stock market development while interest rate has a negative effect on stock market development. The findings of this study reveal that there is no causal relationship between stock market indicator i. The stock market capitalization ratio was used as a proxy for market size while value traded ratio and turnover ratio were used as proxy for market liquidity. The results show that market capitalization and value traded ratios have a very weak negative correlation with economic growth while turnover ratio has a very strong positive correlation with economic growth.
Also, stock market capitalization has a strong positive correlation with stock turnover ratio. This result implies that liquidity has propensity to spur economic growth in Nigeria and that market capitalization influences market liquidity.
We should view with caution the notion that stock market size is not significant for economic growth since multi-co linearity exists in the data used for this analysis. Review of Major Nepalese Studies In Nepalese context, following studies are of some importance while studying about the relationship between stock market and economic growth.
Table Reviews of Major Nepalese Studies Year Name Findings Mahat It examines the state of capital markets and the development of financial institutions in the country. The growth of the financial institutions has been examined both in terms of the growth in the number of financial institutions and in terms of the growth in their assets.
Their role in the national economy has been evaluated in terms of some indicators such as total financial institutions issue ratio and assets to GDP ratio. The study was conducted with the objectives to examine to role played by securities marketing center in promoting Nepalese security. This study covered the period of 4 years. He has concluded that the securities marketing center is very poor in term of the primary market and facing the problem of demand and supply.
Investors are influenced by the value of share and dividend policy of the company while buying or selling the securities. He found that the size of primer as well secondary market has the positive, influence on the overall size of the economic. He further states that increasing issue of equity by firms indicates that the investors are willing to take part in the investment process and thus drive the economic force and strongly performing stock market helps prevails the optimism in the overall economy.
Stock market in Nepal is undeveloped and has failed to show significant impact on the overall national economy of the country. Small market size has made it vulnerable to manipulation and price rigging.
Low turnover ratio and value-traded ratio to volatility, and high concentration ratio indicate that stock market in Nepal is highly illiquid and risky. Investors tend to avoid stock market because they cannot invest in securities according to their risk-return preference. He used only correlation analysis and time series analysis in the study. However, the relationship of GDP with market capitalization and number of listed companies is significant the correlation between economic growth rate and turnover velocity is unexpected and insignificant.
The study finds the long-run integration and causality of macroeconomic variables and stock market indicators even in a small capital market of Nepal, implying that the stock market plays significant role in determining economic growth and vice versa. The study finds that stock market development is not significantly associated with economic growth during mid July to mid July while there is a positive relation between stock market development and economic growth during mid July to mid July The findings indicate that stock market has positive contribution to economic growth in Nepal.
They found that random walk hypothesis holds for less frequently traded stocks but do not hold for highly traded stocks at NEPSE. The finding suggests that stock market development has significantly contributed to the economic growth in Nepal.
In this perspective, a refined policy measures should be adopted to strengthen and improve the role of stock market in order to expedite and maintain the strong growth of the economy. Particularly, our empirical result suggests that Nepalese banking sector is more growth enhancing relative to capital market.
Using 26 annual observations on the time series of real GDP, market capitalization, annual turnover from Mid-July to Mid-July , the results of co-integrated regression showed that both stock market size and liquidity can predict the economic growth of Nepal over the sample period.
Employing Engle-Granger procedures, the study also concluded that stock market size and liquidity are co-integrated with economic growth of Nepal and hence they are interrelated with each other in the long run.
Time series properties of selected variables have been examined. Moreover, empirical results obtained from OLS estimations of behavioral equations reveal that the NEPSE index is found to respond positively to inflation and broad money growth, and negatively to treasury bills rate. This suggests that, in Nepal, share investors seem to take equities as a hedge against inflation and consider stock as an alternative financial instrument.
More importantly, stock market has been found to respond significantly to changes in political environment and the policy of NRB. From the above mentioned Review of Nepalese Studies works makes it clear that the development of the stock market is a necessary factor for modern day economy. Therefore, it is obvious that stock markets be well-functioning for the sustainable economic development. Firms need capital to grow and finance their investment needs. It requires more efficient way of raising funds.
Thus, it assumes a significant role in present day economics. Because of its primary stage of growth and stabilization, the contribution of Nepalese stock market to the economy is yet to be recognized. Though, there has been a lot of studies explaining on the relationship between stock market and economic growth in other contexts, such a study is still due to come in our context. This study aims to fill the gap by assessing the contribution of NEPSE and primary stock market to the overall economic growth of the economy.
Especially regarding what the movements in the stock market with economic variables, very few studies have been done in the past. There is a gap of time period which is fulfilled by this study. The present economic scenario is also change. The using tools of this study are also different from other previous studies. The study incorporates the relationship between stock market and economic growth in Nepal. Also Nepal's stock market has been undergoing significant changes in the last few years with the introduction of new rules and bylaws, improvement in the infrastructure of trading and entry of mutual funds and market makers.
This research will attempt to fill the research gap by exploring the relationship of the NEPSE index with economic variables using the updated stock market data of Nepal. These methods, described in the methodology, define the means or modes of data collection or, sometimes, how a specific result is to be calculated. Research Methodology refers to the various sequential steps to adopt by a researcher in studying a problem with certain objectives in view.
It tries to make clear view of method and process adopted in the entire aspect of the study. It is known as a path from which we can systematically solve the research problem. This research tries to perform a well-designed quantitative and qualitative research in a very clear and direct way using both financial and statistical tools. Detail research methods are described in the following headings. To carry out the study descriptive, co-relational and analytical research design has been employed.
For the purpose of description and conceptualization descriptive and analytical research design is used. However, for the purpose of analyzing the relationship between the variables of stock market development and economic growth, co-relational research design is used.
It is also chosen to investigate the causality between stock market indicators and growth indicators. As the study is related to the aggregate values of the economy as well as the aggregate values of stock market activities no need for primary data has been felt.
The required data are collected on the variables such as GDP, gross domestic saving investment, gross capital formation, market capitalization, turnover, value traded and primary issue approval and NEPSE index. The data on the variables such as stock market volatility has been derived by using appropriate relationship. This is related to the main part of the study. Since the study has been totally confined to the relationship between stock market and economic growth, population and samples are same.
The major part of this study is concerned with testing the relationship of stock market with economic growth. Various related tools and techniques have been used for this purpose.
Trend analysis, correlation analysis regression analysis, econometric models, and other statistical tools have been used for the analysis. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.
It is done to find some kind of relationship between primary markets and secondary markets. In statistics, the term average refers to any of the measures of central tendency. The arithmetic mean is defined as being equal to the sum of the numerical values of each and every observation divided by the total number of observations.
A standard deviation close to 0 indicates that the data points tend to be very close to the mean also called the expected value of the set, while a high standard deviation indicates that the data points are spread out over a wider range of values. These are the measurements that can only take non- negative values.
It is expressed in percentage. Correlation shows the degree of relationship between the variables. It is the square root of the coefficient of multiple determination. Correlation can either be positive or it can be negative. If the values of the variables are directly proportional then the correlation is said to be positive.
It is indicative of the level of explained variability in the model. The coefficient, also commonly known as R-square, is used as a guideline to measure the accuracy of the model. In other words, R2 measure the percentage total variation in dependent variable explained by independent variable the coefficient of determination can have value ranging from zero to one.
A value of one can occur only if the unexplained variation is zero, which simply means that al the data points in the scatter diagram fall exactly on the regression line. In this study, R2 is calculated as the requirement of model. It includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables or 'predictors'. Most commonly, regression analysis estimates the conditional expectation of the dependent variable given the independent variables — that is, the average value of the dependent variable when the independent variables are fixed.
Less commonly, the focus is on a quintile, or other location parameter of the conditional distribution of the dependent variable given the independent variables.
In all cases, the estimation target is a function of the independent variables called the regression function. In regression analysis, it is also of interest to characterize the variation of the dependent variable around the regression function which can be described by a probability distribution.
In this study, basically indicators of economic growth are dependent variables and indicators of stock market development are independent variables. The main objective of this study is to found the relationship between stock market and economy growth. Theoretical statement of the model is that of GDP may be regarded as subject to the constraints of various stock market related variables. These equations are used to assess the nature of relationship between various stock market indicators and economic growth indicators.
In another words, it is better to understand that 'a' constant indicates the mean or average effect on dependent variable of all the variables omitted from the model. In this study, regression constant is calculated for selected dependent and independent variables specified in the model, which is presented above.
In other words the coefficients describe how changes in independent variables affect the values of dependent variables estimate. It is also known that the numerical constant which determines the change in dependent variable per unit change in independent variables i. Standard error of an estimate is a measure of the reliability of the estimating equation, indicating the variability of the observed points around of regression line, i.
The smaller the value of SEE, the closer will be the dots to the regression line and better the estimates based on the equation for this line if SEE is zero, then there is no variation about the line and the correlation will be perfect. Thus, with the help of SEE, it is possible to ascertain how good and representative the regression line is as a description of the average relationship between two series.
Data on important aggregate variables are available only on yearly basis. Admittedly, all economists including those in the planning commission complain this problem, but unfortunately it remains as acute as in the past and rather more acute than most other developing countries. The availability of data is far from ideal. Since all the important data are available on yearly basis, the extensive study is not possible.
It tries to find out the relationship between stock market and economic growth. For this purpose the period of eight years is not adequate to form any kind of relationship but an attempt has been made in that direction. The following are the main limitations of this study.
Had the database been efficient enough and monthly or quarterly data on stock market and growth been available, the result might have been for better and reliable than what is expected from this analysis. The investors are gradually becoming aware of the stock market activities and the authorities are realizing that the development of a strong stock market is highly needed. But, it may be a little too fast to measure the concrete contribution made by stock market to the economy and attempt to from a certain pattern of relationship.
There may form no sensible relation at all or the significance of the relationship may have to be questioned. Therefore, the study in this direction may lead nowhere at the stage, but it is worth attempting. In this chapter, the collected data are presented in systematic manner and analyzed by using different appropriate tools and techniques. This chapter is divided into four sections. A firm in need of capital, unable to find it through other means, ultimately turns towards the equity investors in the primary market.
But the proposition is that only those firms that are performing strongly in the secondary market could be able to raise the equity investments through the primary market. Their shares price and its movements are used as signal by the investors for evaluating its future prospects. Therefore, to examine the direction of the movements of secondary market indicators as well as size of the primary market, simple line trend analysis is performed. Later in the section, the size of the primary market and secondary market is compared with the various indicators of economic growth for the purpose of uniformity in the comparison all the variables i.
Source: - Appendix IV The aforementioned figure 4. Primary and secondary market presents normal sign during study period though the stock market in Nepal is developing slowly. Since it is assumed that the time increases, with it the activities in the stock market also increase.
More firms are listed in the market; move investors participate in investing activities, more information become available in the market and so on. Hence there is positive relationship between the stock market and the national economy. Table 4. Arithmetic mean is average of random variable which can be used for further analysis.
All the data are presented in rupees in billion except turnover is the percentage of value traded to market capitalization, volatility is the standard deviation of monthly NEPSE index and NEPSE index in points.
Standard deviation measures the variability of the observations around the mean value. The coefficient of variation CV is the relative measure of dispersion. Hence the table 4. The value traded has the highest CV of In another words, there is In another words there is 6. The correlation results are presented in the matrix form in table 4.
The following correlations are worth highlighting. Obviously, there is the strong correlation between GDP with saving, investment and capital formation with the coefficient 0. The interesting correlation prevails between the stock market indicator Market Capitalization MC and growth indicators i. The correlation of MC with growth variables is meaningful and telling.
In the context of this significant relationship, few inferences can be made. First, as the MC is the product of market prices of shares multiplied by the outstanding number of shares and if the firms are performing strongly in a bull market, it passes an optimistic message to the general investors who tend to invest more in the market and firms. On the other hand, without having any productive and profitable investment project in hand no firm can be able to influence its share prices in the market.
So to finance such projects firm need to capitalize their earnings which will increase their saving. The inference is that, as the shares are performing strongly in the market general investors as well as firms tend to save their earning for further investment purposes, which ultimately increases the gross domestic saving. Therefore a strong correlation between market capitalization and saving is quite natural. Since the investors individual or institutional tend to save, they invest their saving in the new projects and hence increasing their saving in the new projects and also increasing their investment which fuel up the national capital formation.
The result of all this is that market capitalization is also significantly and positively strongly correlated with gross domestic product. Some other indicators of stock market are also related to the economic growth indicators.
Higher the Value Traded is regarded as the good indicator of stock market that contributes positively towards the economy. Higher the value traded means that the stock market performing better with the maximum participation of the investors. If more investors are involved in the market savings, investment and capital formations are likely to increase and hence the GDP. Therefore, the positive significant correlations are all and expected.
Another indicator of stock market development is Turnover TO which equals to the trading value of the stocks in domestic share market divided by market capitalization. It measures trading relative to the size of the market. Though the correlations of stock market liquidity indicator TO with economic growth indicators, such as GDP, I and CF are positive but the correlations are insignificant and unexpected.
This unexpected and insignificant correlation may be due to the other unobserved factors as described in limitation. The relationship between the size of the Primary Market PM , and economic growth indicators is negative significant. On the basis of these relationships, few interesting implications can be observed. Strongly performing secondary market is also a cause of growing activities in the primary market.
With their prices appreciating in the secondary market, firms feel at case to go for the equity issue in the primary market if and when the situation arises, the investors in the primary markets also look for the productive and profitable investment and invest in the firm's shares that are performing well in the secondary markets.
This interrelation between primary and secondary market also explains the efficiency of the market. And the market efficiency is closely related to the efficiency of the economy except ignoring some of the coefficient values. The results presented in table 4. The regression coefficient of market capitalization is 0.
The regression coefficient of turnover is It is due to the comparison of data between amount in rupees and percentage. But the reasons for the positive relations of market capitalization and turnover are clear. The relation of gross domestic product with market capitalization is that as market capitalization is the market value of all listed outstanding share and the price element is associated with it.
Pricing of securities is done with a lot of aspects keeping in view. Some factors are the profitability of the firm, its investment plans and its saving position. If prices of stocks are increasing its shows that the listed firms on an average have got good investment projects in their hands and are expected to be turned profitable in the future.
The relation with liquidity indicator turnover is also positive and understandable. The more amounts of shares traded the better because, the more transaction of share is the indication that the more investors are joining the market and resource are mobilized. Resource mobilization is a factor to growth. Other remaining stock market indicators variable seems negative regression coefficient, which indicates inverse relation with gross domestic product. The coefficient of market capitalization, value traded, turnover, volatility, size of primary market and NEPSE index are The coefficient of value traded is 3.
But, as before, these results also must be viewed skeptically as the number of observation is only eight. And same may be the cause for the negative coefficients of market capitalization, turnover, volatility and NEPSE Index, which is just the opposite of theorized relationship between these variables with saving.
But the result of Value Traded is significantly and positively related to saving is encouraging sign. The positive relation between Size of Primary Market has also the similar explanation. And finally negative relationship of market capitalization, turnover, volatility and NEPSE Index is not understandable the results may have been driven by other factors or wrong assumptions.
The regression coefficients of value traded is 2. Similarly the regression coefficient of volatility and size of primary market is 0. The value of R2 is 0. From the results presented in table 4. But the coefficient of two variables i. The analysis of the relationship between the stock market variables such a s market capitalization, value traded, turnover, volatility, size of primary market and NEPSE Index and the aggregate economic growth variables such as gross domestic product, saving, investments and capital formation is performed.
The results obtained in analysis are mixed type. In some of the cases, the relationship found to be consistent with the assumption. The chapter presented the data and analyzed those data in the context of the objectives of the study.
In the next chapter, the major finding of the study, summary and conclusion are outlined along with the recommendation for future research possibilities in this area. With the help of the secondary data, the researcher calculates the values related with relationship between stock market and economic growth.
This marks more and more individual as well as institutional investors are involved in the market in subsequent years. This certainly tells about the positive relationship between financial markets and real activities in the economy. Overall Nepalese economy seems fluctuating situation. Though the increase in Market Capitalization is not very quick fast, but keeping in mind the state of our economy, it is encouraging.
All the coefficients are positive and highly significant except Saving S. All the coefficients are positive. All the coefficients are negative. The coefficients are both positive and negative. The casual relation tells that with the increase in the size of the market as measured by MC and TO, the size of the economy as measured by GDP, also increases. This result supports theoretical assumption of Levine and Zervos These results are consistent with assumption.
The casual relation specifies that with the size of the secondary stock market saving level of the economy also increases due to the increased saving by firms and individuals. So far, the cause of results being insignificant concerned, there may be other factors such as very small observation period, data dissertations and other invisible factors.
Since stock market is a vehicle for economic growth in our context, the stock market should be integrated into the whole economic system of the country while designing economic policies. The key policy implication is that the country requires a well-built and enabling stock market in order to accelerate and maintain strong growth of the economy. Hence, meaningful efforts are required on the part of the government to ensure well-organized and competent operation of stock market because the more efficient the market, the more possibility it will attract investors.
Stock market works as the medium to channelize the saving resources towards the productive uses in the form of investment. Whereas secondary stock market does it by influencing the perception of investors and firms about the economic activities and prospect, the primary market plays the vital role directly in increasing the investment level and thus, capital stock of firms through mobilizing the savings of individual investors as well as institutional bodies.
An efficient stock market is the medium through which only productive firms that have better performance can easily raise capital through primary markets.
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