Stock Markets and Growth: A Re-Evaluation
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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