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Stock market development and financial deepening in developing countries : some correlation patterns

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  • Dong He
  • Pardy, Robert

Abstract

Programs to develop securities markets are now a common feature of World Bank financial sector loans. Stock market development in particular is receiving considerable attention, especially the legal and institutional underpinnings required for successful stock market development. The financial underpinnings needed have received less study. The authors contribute to such a study by exploring the relationship between the degrees of financial depth and stock market development in an economy. Using a simple indicator of stock market development and several indicators of financial depth, and using cross-sectional data from 32 developing countries for 1984-90, they find a strong correlation between the two factors. Time-series data from 19 of these countries (for 1978-90) show similar correlations for most Asian countries, but not for other countries in the sample. Also, the correlations of the Asian data are strongest after the mid-1980s. They test a"threshold hypothesis"that a certain level of financial depth may be necessary to allow stock market development to take off. They find that available data do not support the hypothesis. The results suggest that financial depth is a significant factor in stock market development in most developing countries, but that country specific factors (such as industrial policy and structure, foreign investment controls, and stock market regulatory and operational infrastructure) have an equally strong influence on stock market growth. Case studies of economies in which stock market development has been successful would help elucidate the interplay between these factors.

Suggested Citation

  • Dong He & Pardy, Robert, 1993. "Stock market development and financial deepening in developing countries : some correlation patterns," Policy Research Working Paper Series 1084, The World Bank.
    • Handle: RePEc:wbk:wbrwps:1084
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    References listed on IDEAS

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    1. Pardy, Robert, 1992. "Institutional reform in emerging securities markets," Policy Research Working Paper Series 907, The World Bank.
    2. King, Robert G. & Levine, Ross, 1992. "Financial indicators and growth in a cross section of countries," Policy Research Working Paper Series 819, The World Bank.
    3. Dailami, Mansoor & Atkin, Michael, 1990. "Stock markets in developing countries : key issues and a research agenda," Policy Research Working Paper Series 515, The World Bank.
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    2. Doojav, Gan-Ochir & Damdinsuren, Batnyam & Baasansuren, Lkhagvajav, 2007. "Monetary policy and bond market development: A case of Mongolia," MPRA Paper 72193, University Library of Munich, Germany, revised May 2007.
    3. Ferro, Gustavo & Antón Rodríguez, Martín, 2007. "Crédito, producto y eficiencia en la producción de crecimiento [Credit, production and efficiency in the production of growth]," MPRA Paper 15094, University Library of Munich, Germany, revised Mar 2009.

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