Determinants of stock market development in emerging economies.

Abstract

There is no advanced economy that has achieved a remarkable economic development without the establishment and the development of capital markets. Well-functioning stock markets are expected to influence growth through increased capital accumulation and by influencing the efficiency of capital allocation. Singh (1999) argues that capital market might face serious challenges in emerging economies due to the huge costs and the poor financial structures. These problems are magnified in emerging economies with their weaker regulatory institutions and greater macroeconomic volatility. The objectives of this thesis are to examine the relationship between education and stock market development; institutional quality and stock market performance; and some selected macro-economic (Consumer Price Index and Money Supply) and stock market development. A panel data of 41 emerging economies for the period 1996 to 2011 is used to estimate the results. The techniques employed on these models are the Dynamic Ordinary Lease Squares and Newey-West to account for different characteristics of emerging economies. The main findings are that education interacts with GDP to influence stock market development; institutional quality interacts with GDP to affect stock market development, then finally selected macroeconomic variables such as Money Supply and Consumer Price Index, all of which interact with GDP to influence stock market development. Recommendations for emerging economies are; the education ministers should reduce illiteracy rate by increasing secondary school enrolment; Security and Exchange Commission to establish transparent regulatory framework that will resolve industrial disputes and create liquid securities market; finally, finance ministers have to broaden investor base to include more foreigners and then stabilizing the macroeconomic indicators.