Macroeconomic and Institutional Determinants of Stock Market Development in Emerging Economies

Stock market development in developing economies has experienced inadequacies in maintaining its steady growth rate.  Empirical evidences linking stock market development in emerging countries to economic growth has been inconclusive.  This research therefore empirically estimated the macroeconomic and institutional determinants of stock market development in 43 emerging economies using Generalized Method of Moment Estimation. The data used for the analysis were collected from World Development Indicator and Transparency International for a period of 1996 to 2011. The result shows that banking sector development, income, inflation and foreign direct investment are the macroeconomic determinants of stock market development in emerging economies while the only significant institutional indicator was political stability.  The Hansen's J test of over identifying restriction was used to check for the correct model specification.  The result tends to significantly validate the estimated model with the GMM procedure.  To promote stock market development in emerging markets, foreign direct investment and banking sector development should be encouraged by appropriate policies. It is again recommended that political stability as the key institutional indicator of stock market development needs to be revisited and positive policies implemented to foster stock market development in emerging economies.  This will add significant value to the economy of the emerging countries and the world at large.

 

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