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Stock Markets and Growth: A Re-Evaluation

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  • Chase Parker DeHan
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    Abstract

    There is a large body of literature stressing the importance of developing financial markets, including stock markets, to enhance countries’ growth. I argue that the relationship between stock markets and growth is exaggerated and that the simple act of opening a formal stock market is not a good predictor of whether a country will experience economic growth. While it is possible that in some instances opening a stock market can lead to increased growth, I do not find any evidence that opening a stock market has any impact. This research uses two Bayesian econometric methods, Extreme Bounds Analysis (EBA) and Bayesian Model Averaging (BMA), to discover if there are meaningful links between stock markets and growth in developing economies. Superior to traditional cross-sectional regressions, these methodologies allow for determining the true impact of certain variables. Using a similar dataset to multiple other studies, I find a zero, or weakly negative, correlation between the opening of a stock market and growth in developing countries. 82 countries and 32 independent variables were used comparing all stock market openings between 1960 and 1999 to those without a stock market on growth between 2002 and 2007.

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    File URL: http://economics.utah.edu/publications/DeHan_2012_08.pdf
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    Bibliographic Info

    Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number dehan_2012_08.

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    Length: 24 pages
    Date of creation: 2012
    Date of revision:
    Handle: RePEc:uta:papers:dehan_2012_08

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    Related research

    Keywords: Bayesian econometrics; stock markets; development JEL Classification: O17; E44; C11;

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    1. Gernot Doppelhofer & Ronald I. Miller & Xavier Sala-i-Martin, 2000. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (Bace) Approach," OECD Economics Department Working Papers 266, OECD Publishing.
    2. Rousseau, P. L. & Wachtel, P., 2000. "Equity markets and growth: Cross-country evidence on timing and outcomes, 1980-1995," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1933-1957, December.
    3. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
    4. Rati Ram, 1999. "Financial development and economic growth: Additional evidence," Journal of Development Studies, Taylor & Francis Journals, vol. 35(4), pages 164-174.
    5. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, 07.
    6. Scott Baier & Gerald P. Dwyer, Jr. & Robert Tamura, 2003. "Does opening a stock exchange increase economic growth?," Working Paper 2003-36, Federal Reserve Bank of Atlanta.
    7. Harris, Richard D. F., 1997. "Stock markets and development: A re-assessment," European Economic Review, Elsevier, vol. 41(1), pages 139-146, January.
    8. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
    9. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-65, September.
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