Stock Market Development Essay

Mohd Tasnim Chowdhury

201106417

Investment project

Spring 2014

Instructor: Dr. Ritab al khouri

The effect of the stock market development and growth on the real economy

Introduction

Most of the developing countries have least restrictions on domestic equity securities and on local investment abroad. A higher level of education in the country clearly depicts that such stock market liberalizations promote economic growth. The performance of stock market during recent financial crisis and associated output declines experienced by numerous emerging market economies have increased a new concern of links between financial and real variables. In the case of United states and some other advanced countries, the empirical relationship between real economic activity and lagged real stock returns has been investigated in depth. Apparently, this connection remains startlingly unfamiliar in the situation of emerging market economies. Furthermore although numerous theories have been anticipated to explain the empirical relationship across country diversity in its strength have not been used to differentiate along with existing theories.

Stock returns and growth in advanced economies

To begin with, we need to examine thoroughly the correlation linking real stock returns and economic growth in a group of emerging market and highly developed economies.

In United States the correlation among real economic activity and lagged real stock returns is optimistic and statistically and economically important. Countries such as Canada, Japan, Germany and the United Kingdom and several other European countires hold a similar relationship. Even though the correlation is important and stock returns provide important informatio...

... middle of paper ...

...segment GDP in a model of 13 OECD countries.

Summing up, earlier empirical research has recommended a relationship between stock market growth and economic development, but is far away from perfect. Even though the connection proposed is a causal one, the majority empirical studies have faced causality indirectly, if at all. Additionally, the majority

studies have not sufficiently dealt with the information that efficient markets should slot in predictable future growth into current period prices.

Reference

Gupta, N., & Yaun, K. On the growth stock market liberalizations. July 2008

Code, R. A., Moshirian, F., & Wu, Q. Bank stock returns and economic growth. September 2007

Mauro, P. Stock returns and output growth in emerging and advanced economies. May 2002

Naceur, S. B., & Ghazouani, S. Stock markets, banks, and economic growth. June 2006