The determinants of stock markets growth: a worlwide perspective

Abstract

This paper presents a non-recursive behavioral structural model of stock markets growth. The model establishes the linkages between stock markets and economic activity. Economic progress and additional liquidity are identified as the major determinants of market growth. The performance of the model to examined based on the evolution of world stock markets during the 80's. Pooling regressions combining individual stock markets from 41 countries and time-series data for the period are used. Besides the results for total world markets, an analysis of the modal in emerging and developed markets; and in four different regions is made. The model performs as anticipated. Except for slight differences on the Impact of liquidity, aging and developed markets show a similar respond to economic growth and liquidity increases. On a regional basis, several differ identified due to the different response of stock prices and listings to economic growth and liquidity increases. Particularl noticeable are differences regarding Liquidity preferences In different regions. The basic model permits to evaluate in general terms the performance of the market under several economic policies. Its inclusion in a macro-model is suggested for analyzing in detail policy effects. Additional extensions tor further research are suggested.