tailieunhanh - MACROECONOMIC DETERMINANTS OF STOCK MARKET DEVELOPMENT

The model yields the following results. First, the model is consistent with volatility clustering or GARCH e¤ects. The market price of risk, which is the instantaneous component of stock return volatility, has three components: endowment risk, sentiment risk and solvency risk. These three components are persistent, hence the model reproduces volatility clustering or GARCH e¤ects. Endowment risk is persistent because the "two-trees" feature of the model imply that endowment risk is proportional to the shares of aggregate endowment, which uctuate randomly between zero and one. Sentiment risk is persistent because it is proportional to the optimal share of aggregate consumption which uctuate randomly between zero and one | Journal of Applied Economics Vol. II No. 1 May 1999 29-59 MACROECONOMIC DETERMINANTS OF STOCK MARKET DEVELOPMENT Valeriano F. Garcia and Lin Liu Using pooled data from fifteen industrial and developing countries from 1980 to 1995 this paper examines the macroeconomic determinants of stock market development particularly market capitalization. The paper finds that 1 real income saving rate financial intermediary development and stock market liquidity are important determinants of stock market capitalization 2 macroeconomic volatility does not prove significant and 3 stock market development and financial intermediary development are complements instead of substitutes. Introduction Ever since the pioneering contributions of Gurley and Shaw 1955 1960 1967 McKinnon 1973 and Shaw 1973 the relationship between financial development and economic growth has been an important issue of debate. Numerous studies have dealt with different aspects of this relationship at both theoretical and empirical levels. The broadest division of a financial system is between financial intermediaries banks insurance companies and pension funds and markets bond and stock markets . A large part of an economy s savings are intermediated towards productive investments through financial Valeriano Garcia is Executive Director at the World Bank and Lin Liu is research fellow at the University of Kentucky. The authors acknowledge very useful comments on a first draft by Doug Bice Victor Elias James Fackler Rodolfo Maino Allan Meltzer Sarath Rajapatirana Liliana Schumacher and J. P. Singh. The usual caveat for responsibility holds fully. 30 Journal of Applied Economics intermediaries and markets. Since the rate of capital accumulation is a fundamental determinant of long-term growth an efficient financial system is essential for an economy. Earlier research emphasized the role of the banking sector in economic growth. in the past decade the world stock markets surged and emerging markets accounted .

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