Determinants of the Brazilian stock market development

Abstract

In this paper, we examine the key determinants of stock market development in Brazil during the period from 1980 to 2016. The study was motivated by the growing important role of stock market development in economic development, on the one hand, and the conflicting findings on the determinants of stock market development, on the other hand. Unlike some previous studies that used cross-sectional data, the current study has used time-series techniques that take into consideration the Brazilian country-specific issues. Furthermore, the current study has also employed the ARDL bounds testing procedure to determine the determinants of stock market development in Brazil. This procedure is well known for its superior small sample properties; hence it is considered more suitable for this study. The results of the study reveal that the stock market development in Brazil is positively determined by trade openness, banking sector development and exchange rate, irrespective of whether the analysis is done in the long run or in the short run. Contrary to the results of some previous studies, investment and stock market liquidity are found to have a negative influence on the development of stock market in Brazil – both in the long run and in the short run. The study, therefore, recommends that policies that favour international trade, bank-based financial sector development and exchange rate stability should be pursued in Brazil, as this would translate into further stock market development.