The macroeconimic determinants of stock market development : experience from two Asian countries

Abstract

This study examined the relationship between a set of macroeconomic variables and stock market development in Hong Kong and the Philippines for the periods of 1992Q4-2016Q3 and 2001Q4-2016Q4 respectively. In recent decades, the stock markets in Hong Kong and the Philippines have experienced remarkable growth. While the literature has produced diverse views on the relationship between each determinant and the stock market, there are no relevant studies on the determinants of stock market development on these two countries. Against this background, this study enriched the literature by investigating the macroeconomic determinants of stock market development in these two countries using the autoregressive distributed lag bounds testing approach. The empirical results of this study revealed a number of interesting findings. In the case of Hong Kong, the results showed that banking sector development and economic growth exerted positive impacts, whereas the inflation rate and exchange rate exerted negative impacts on stock market development both in the long and short run. In addition, the results showed that trade openness had a positive long-run impact, but a negative short-run impact on stock market development. Therefore, policymakers should pursue policies that foster banking sector development, enhance economic growth and maintain trade openness in order to foster the development of the stock market. In addition, monetary authority should strive to maintain a low level of inflation rate and the value of the domestic currency so as to further promote stock market development. In the case of the Philippines, the study found that trade openness had a negative impact on the development of the stock market in the long run, whereas banking sector development, and the exchange rate had positive impacts in the short run. Based on these findings, policymakers should consider policies that promote the use of equity financing in the production of main exports, enhance banking sector development, and maintain the stability of the domestic currency in order to promote the development of the stock market.