Drivers of Capital Market Development: The Role of Economic Growth, Credit, and Trading Activity in Romania, Poland, and Hungary

The development of the capital market is an integral part of financial system formation and a facilitator of economic growth. This paper scrutinizes the fundamental determinants of stock market capitalization in Romania, Poland, and Hungary, with particular emphasis on economic growth, domestic credit to the private sector, and trading activity. Financial development is acknowledged as a general driver of economic growth; however, the contributions of particular determinants to stock market development are different across economies. The existing literature presents not only divergent views but also a general discord regarding the relationship between capital markets and economic growth. While some studies emphasize credit availability and financial intermediation, others see liquidity in the stock markets and investor participation as critical. Nonetheless, there has been little comparative research on the drivers of capital market development across Central and Eastern European economies — an area that clearly calls for more empirical work. This study uses a regression framework to analyze the capacity of GDP, domestic credit, and trading volume to explain stock market capitalization dynamics. Results indicate that the three countries exhibit different patterns. It points to the different types of financial systems in new European countries. By finding out what things help capital markets grow in each country, this research adds to the bigger talk about joining finances together and how well markets work. The results give good ideas for decision-makers and investors who want to improve money stability and support long-lasting growth in the area.