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Stock market development and financial intermediaries : stylized facts

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  • Demirguc-Kunt, Asli
  • Levine, Ross

Abstract

World stock markets are booming. Between 1982 and 1993, stock market capitalization grew from $2 trillion to $10 trillion, an average 15 percent a year. A disproportionate amount of this growth was in emerging stock markets, which rose from 3 percent of world stock markets capitalization to 14 percent in the same period. Yet there is little empirical evidence about how important stock markets are to long-term economic development. Economists have neither a common concept nor a common measure of stock market development, so we know little about how stock market development affects the rest of the financial system or how corporations finance themselves. The authors collected and compared many different indicators of stock market development using data on 41 countries from 1986 to 1993. Each indicator has statistical and conceptual shortcomings, so they used different measures of stock market size, liquidity, concentration, and volatility, of institutional development, and of international integration. Their goal: to summarize infromation about a variety of indicators for stock market development, in order to facilitate research into the links between stock markets, economic development, and corporate financing decisions. They highlight certain important correlations: (i) In the 41 countries they studied, there are enormous cross-country differences in the level of stock market development for each indicator. The ratio of market capitalization to the gross domestic product (GDP), for example, is greater than 1 in five countries and less than 0.10 in five others. (ii) There are intuitively appealing correlations among indicators. For example, big markets tend to be less volatile, more liquid, and less concentrated in a few stocks. Internationally integrated markets tend to be less volatile. And institutionally developed markets tend to be large and liquid. (iii) The three most developed markets are in Japan, the United Kingdom, and the United States. The most underdeveloped markets are in Colombia, Nigeria, Venezuela, and Zimbabwe. Malaysia, the Republic of Korea, and Switzerland seem to have highly developed stock market, whereas Argentina, Greece, Pakistan and Turkey have underdeveloped in richer countries, but many markets commonly labeled"emerging"(for example, in Korea, Malaysia,and Thailand) are systematically more developed than markets commonly labeled"developed"(for example, in Australia, Canada, and many European countries). (iv) Between 1986 and 1993, some markets developed rapidly in size, liquidity, and international integration. Indonesia, Portugal, Turkey, and Venezuela experienced explosive development, for example. Case studies on the reasons for (and economic consequences of) this rapid development could yield valuable insights. (v) The level of stock market development is highly correlated with the development of banks, nonbank financial institutions (finance companies, mutual funds, brokerage houses), insurance companies, and private pension funds.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1462.

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Date of creation: 31 May 1995
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Handle: RePEc:wbk:wbrwps:1462

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Keywords: Markets and Market Access; Economic Theory&Research; Health Economics&Finance; Payment Systems&Infrastructure; Banks&Banking Reform; Economic Theory&Research; Health Economics&Finance; Access to Markets; Markets and Market Access; Banks&Banking Reform;

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  1. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
  2. Errunza, Vihang R. & Losq, Etienne, 1985. "The behavior of stock prices on LDC markets," Journal of Banking & Finance, Elsevier, vol. 9(4), pages 561-575, December.
  3. G. William Schwert, 1990. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
  4. Maurice Obstfeld., 1993. "Risk-Taking, Global Diversification, and Growth," Center for International and Development Economics Research (CIDER) Working Papers C93-016, University of California at Berkeley.
  5. Levine, Ross, 1989. "An International Arbitrage Pricing Model with PPP Deviations," Economic Inquiry, Western Economic Association International, vol. 27(4), pages 587-99, October.
  6. Claessens, Stijn & Dasgupta, Susmita & Glen, Jack, 1995. "The cross-section of stock returns : evidence from emerging markets," Policy Research Working Paper Series 1505, The World Bank.
  7. Bencivenga Valerie R. & Smith Bruce D. & Starr Ross M., 1995. "Transactions Costs, Technological Choice, and Endogenous Growth," Journal of Economic Theory, Elsevier, vol. 67(1), pages 153-177, October.
  8. Gultekin, Mustafa N & Gultekin, N Bulent & Penati, Alessandro, 1989. " Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets," Journal of Finance, American Finance Association, vol. 44(4), pages 849-69, September.
  9. Levine, Ross, 1991. " Stock Markets, Growth, and Tax Policy," Journal of Finance, American Finance Association, vol. 46(4), pages 1445-65, September.
  10. Cho, D Chinhyung & Eun, Cheol S & Senbet, Lemma W, 1986. " International Arbitrage Pricing Theory: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 41(2), pages 313-29, June.
  11. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
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