Professional Documents
Culture Documents
Dynamic Interactions Between Stockmarket Sand The Real Economy
Dynamic Interactions Between Stockmarket Sand The Real Economy
Abstract
This paper re-examines the relationship between a country’s aggregate stock market and general economic
development for fourteen emerging economies for the period from 1995 to 2014. When examining the linkage
between the stock market and economic development, proxied by GDP growth or with gross fixed capital
formation growth, we did not find a meaningful relationship between them. However, when we included
additional control variables strong, dynamic interactions between the two magnitudes surfaced. Specifically, it
was found that the stock market is positively and robustly correlated with contemporaneous and future real
economic development and, thus, it directly contributed to a country’s economic development either through
the production of goods and services or the accumulation of real capital. Thus, it can be inferred that the stock
market alone is not capable of boosting economic development in these countries unless being part of a
comprehensive financial system (which includes banks) as well as investment in real capital. The policy
implications are clear. Government authorities must recognize that the stock market alone is not a driver of
economic development and that a sound, efficient financial system (which includes banks) must be present in
order to contribute and foster economic development.
Nikiforos T. Laopodis
ALBA Graduate Business School and
Deree College at
The American College of Greece
Xenias 6-8, 115 27 Athens, Greece
Tel: +30 (210) 8964531 ext. 3306
E-mails: nlaopodi@alba.edu.gr; nlaopodis@acg.edu
Andreas Papastamou
Pantion University, Athens, School of International and European Studies, and
Economic Counselor, Ministry of Foreign Affairs, Greece
Akadimias 1, Athens-10671
Tel. 210-9444.959
E-mail: apapastamos@gmail.com
4
the major findings and, lastly, Section V summarizes the study and concludes with some
recommendations for future research.
A. Descriptive Statistics
Table 1 presents some descriptives (means, maximum and minimum values and
standard deviations) for GDP and GFCF growth rates, and the change in short-term
interests rates (in Panel A) and stock market growth rates (in Panel B) for all countries. From
Panel A we observe that South Africa had the highest GDP growth rate (7.46%) during the
period examined while Mexico had the lowest (0.65%). Several countries such as Argentina,
7
Estonia, Iceland, Slovak Republic, and Turkey experienced sharp fluctuations in their GDP
growth as evidenced by their min and max values as well as their standard deviations.
Turkey, Indonesia and Argentina had the highest growth in gross fixed capital ranging from
6.73% to 3.29% while the Czech Republic had the lowest growth (0.97%). As regards the
change in the nominal short-term (3-month Treasury bill) interest rates, Argentina and
Turkey witnessed the highest variability, whereas Iceland witnessed the lowest variability.
Real short-term rate changes also exhibited similar patterns abut are omitted from the table
for the sake of space preservation.
Panel B of the table shows each country’s stock market growth rates along with
some other statistics. From the values, it can be seen that Turkey experienced the highest
stock market growth (7.18), followed by Mexico (4%), while the Slovak and the Czech
Republics experienced the lowest growth rates (0.07% and 0.89%, respectively). Iceland and
Turkey had the highest stock market volatility, as evidenced from their standard deviations
(19.78% and 19.18%, respectively), whereas Chile and South Africa recorded the lowest
volatility (7.23% and 8.0%, respectively).
Figure 1 illustrates each country’s (log of) GDP and (log of the) stock market index
(SP) over the period examined, 1995 to 2014. From the graphs, one can see that each
country’s GDP remained roughly flat while the paths of their stock market showed some
trends. For example, Argentina’s, Estonia’s and Turkey’s stock markets experienced steeper
advances than those of Brazil, Chile, Hungary, Indonesia, Mexico, Poland, or South Africa.
By contrast, while Iceland’s stock market followed a steep advance during the mid1990s and
early to mid2000s, it sharply dropped in 2007 due to the global financial crisis of 2007/8, the
stock markets of the Czech Republic, India, and Slovak Republic remained rather flat. These
observations corroborate the descriptive statistics reported above. Thus, one message from
the graphical analysis is that each country’s stock market appeared to follow its own trend
irrespective of the domestic development conditions (as reflected in GDP figures).
k
∆2 yt = α + β∆yt-1 + ∑ γj ∆2 yt-j + εt (1b)
j=1
where y is the series under consideration, ∆ the difference operator, and k the number of
lagged differences included in order to capture any autocorrelation. Eq. (1a) tests for a single
unit root whereas eq. (1b) for two unit roots. The optimal number of k is chosen so as to
make the Ljung–Box portmanteau statistic fail to reject the null hypothesis of no serial
correlation in the residuals in Eqs. (1a) and (1b). Essentially, this test is a pseudo t-statistic
for the null hypothesis H0: β = 0. In Panel A of Table 2, we only report the probability
values for each series, which should be less than 0.05 for a stationary series, or greater than
0.05 for a non-stationary series (or one containing a unit root).
However, the (Augmented) Dickey–Fuller tests have been criticized on the grounds
that their failure to reject a unit root may be attributed to their weak power against stationary
alternatives. The KPSS (Kwiatkowski et al., 1992) test is an alternate test of the null
hypothesis of stationarity against the alternative of a unit root. This procedure is considered
as a complement to the ADF test. The KPSS test statistic involves the following equation:
where
T
St = Σ ei t = 1, 2, … , T (2b)
t=1
and
T L T
s2 = T-1 Σ e2t + 2T-1 Σ { 1 – [s/(L+1)]} Σ et et-s (2c)
t=1 s=1 t=s+1
The et are the residuals obtained by regressing the series being tested on a constant, T
is the number of observations and L is the lag length. If the test statistic exceeds the critical
values, the null hypothesis of stationarity is rejected in favor of the unit root alternative. The
results from this test are given in Panel B of Table 2. The null hypothesis of stationarity in
the levels of each variable is clearly rejected as is also the null of stationarity in first
9
differences of the two series. Therefore, these tests show unambiguously that both GDP and
SP series share similar properties, that is, they are nonstationary in the levels and contain a
unit root.
Engle and Granger (1987) define cointegration as the possibility that two or more
variables share a common stochastic trend, even though the variables may wander freely and
independently. Cointegration tests thus are employed to detect any stable long-run
relationships between variables. More formally, two variables like GDPt and stock price
index, SPt, are said to be cointegrated if their difference εt = GDPt – b SPt is I(0). The
equilibrium error, εt, can be estimated from the regression
where β is an estimate of b and (a+δt) provide an estimate of εt. The same approach applies
to the GFCF and SP variable pair.
We test for cointegration between GDP and SP by applying the ADF test to the
residual series δt from the above equation. Specifically, the test is based on the following
regression equation:
k
∆δt = θδt-1 + ∑ θj δt-1 + Ψt (4)
j=1
where k is the number of lagged differences included to reflect any autocorrelation and is
selected such that the Ljung–Box Q-statistic fails to reject the null hypothesis of no serial
correlation in the residuals of eq. (4). The test, again, is a pseudo t-statistic for the null
hypothesis of θ = 0. Because these residuals have zero mean, no intercept is included in
these tests. The null hypothesis of no cointegration is rejected when the t-statistic is negative
and greater (in absolute terms) than the critical values, at the conventional 5% level. This
suggests that the residuals from this regression would be I(0).
The results from the test are reported in Panel C of Table 2. From these findings, it
is evident that the null of no cointegration is accepted for all countries since the t-statistics
are negative and statistically significant (at the 5% level). The results from the GFCF and SP
variables also showed absence of cointegration and are omitted them from the table for the
sake of space conservation (but are available upon request). What these findings actually
mean is that in these emerging economies the stock market does not follow or adjust to the
real economy (as measured by GDP or capital formation growth) in the long run making
10
both sectors (the financial and the real) disconnected. Thus, effective or efficient channeling
of funds from the financial sector to the real economy may not take place in these
economies rendering economic growth slower than it should.
A further interpretation of the absence of cointegration between the stock market
and each of the two economic development indicators might be the fact that the stock
market on its own may not lead to economic growth. Perhaps, when combined with other
supportive economic/financial measures such as public investment and expenditures, a well-
functioning banking system or foreign direct investment may contribute to the country’s
economic growth. We do not examine this possibility in this paper but leave it for the future.
where y1t and y2t are GDP growth and nominal stock returns, respectively, and u1t, u2t are
error terms. This model can capture the short-run dynamic behavior between the two time
series through the α11 and α21 coefficients. Coefficients β11 and β21 capture own variable
dynamic behavior (impact) on its current value. For instance, if one or more of the α11
coefficients (if more than one lag is required) are nonzero and statistically significant,
changes in the stock market will have a short-run effect on the GDP growth. Similarly, if at
least one of the α21 coefficients is nonzero and statistically significant, movements in the
GDP growth will affect the stock market index in the short run. Finally, the error terms, u1t
and u2t are stationary random processes intended to capture other relevant information,
which is not contained in the lagged values of the two variables. In other words, this
specification represents an appropriate setting for examining the Granger-causality (or lead-
lag relations) between the variables. Finally, by analogy the same specification applies to the
GFCF and SP variables.
11
A potential problem in estimating the VAR model is how to determine the optimal
lag structure because if misspecified the empirical estimates will be biased and will simply
reflect the imposed lag specification. A way to circumvent this problem is to use a lag-
selection criterion such as Akaike’s (1969) Final Prediction Criterion (FPE). This criterion is
given by
T
where T is the number of observations, y1t is the actual change in the GDP variable from
period t − 1 to t, ∆p y1t is the predicted change in the variable during the same period and (p,
k) is the lag structure that minimizes the FPE. The predicted value is obtained by OLS
regression on Eqs. (5a) and (5b) with a pre-selected lag structure on GDPt-i. The first
bracketed term of Eq. (6) captures the estimation error, while the second term measures the
average modeling error. In essence, FPE balances the bias from choosing too small a lag
order with the increased variance of a higher lag-order specification.
12
where yit is the dependent variable, is the intercept term, β is a k×1 vector of parameters to
In essence, one can think of μi as capturing all of the variables that affect yit cross-
sectionally but do not vary over time.1
By contrast, the random effects approach proposes different intercept terms for each
country (entity) but, again, these intercepts are constant over time (the relationships between
the independent and dependent variables are assumed to be the same cross-sectionally and
over time). The main difference is that the intercepts for each cross-sectional entity are
assumed to arise from a common intercept α (which is the same cross-sectionally and over
time), plus a random variable ei that varies cross-sectionally but is constant over time. That
random variable measures the random deviation of each entity’s intercept term from the
overall intercept α. The random effects panel model can be expressed as
1 One could augment the above specification by including an intercept in the regression and allow it to vary
over time but assume it to be the same across entities at each given point in time. The model would be
renamed time-fixed effects model. One would employ such a specification if one thought that the average value
of the dependent variable changes over time but not across countries (or cross-sectionally).
13
where xit is the vector of explanatory variables. This specification assumes that the cross-
sectional error term, ei, has zero mean, is independent of the individual observation error
term (vit), has constant variance and is independent of the explanatory variables.
In general, the fundamental difference between fixed and random effects
specifications is whether the unobserved individual effect includes elements that are
correlated with the regressors in the model, not whether these effects are stochastic or not.
To decide on the appropriate effects model, we will use the Hausman specification test.
Specifically, we estimate the following panel specification:
where Yit are either GDP growth or GFCF growth (for i = 1, . . ., N=14, t = 1, . . ., T=80,
per country) also appearing with one-period lag as independent variables, ∆SPit is the change
in stock prices (or nominal stock returns), ∆IRit is the change in the short- or long-term rate
in each country, Yit•∆IRit is an interaction term, and, finally, νit is the idiosyncratic error term.
The two interaction terms, GDP growth with the interest rate and GFCF growth with the
interest rate, are included to see if real economic growth is related to changes in the interest
rates in addition to the stock market’s movements. Additional explanatory variable lags as
well as the rate of inflation variable are included in the model as we estimate six different
model variants.
A. VAR Results
A.1 Dynamics between GDP and SP
From Panel A of Table 3 we note general absence of short-term interactions
between economic development (growth rate) and stock market changes during the period
of investigation. Specifically, we observe strong interactions only in the cases of Argentina
and Poland (as seen by the statistical significance of the ∆SP coefficients in the first
equation) suggesting that stock market changes did advance domestic economic
development in these two countries. In most other cases (Brazil, Chile, Czech Republic,
Estonia, Hungary, Mexico, S. Africa, Slovak Republic and Turkey) the stock market
marginally contributed to economic advancement. When investigating the contribution of
the domestic economy to the stock market, we found that the former was not always
important for the stock market. Specifically, in Hungary there was some positive feedback
from the economy to the stock market, while in countries like Chile, India and Indonesia we
saw the reverse. Finally, for the remaining countries there was no interaction between the
two magnitudes. Overall, we can (tentatively) conclude that there were no short-term,
dynamic inter-relationships between the two magnitudes in these emerging markets.
Figure 2 shows the dynamic impact (reaction) of a shock in the stock market on a
country’s economy extended over twelve periods (or 4 years, given quarterly observations).
Red dotted lines are the one-standard deviation error bands. In general, we note that stock
market innovations (shocks) seem to impact the economy albeit to varying degrees in each
country. Specifically, higher positive impact is observed for Argentina, the Czech Republic,
Estonia, Mexico and Turkey, while lower positive impact for Chile, Iceland, Indonesia,
Poland and the Slovak Republic. The only exception is the negative reaction of the economy
to stock market movements which took place in Poland. Figure 3 illustrates the reverse, that
is, the reaction of the stock market to economic movements. From these graphs, we see that
economic advances marginally contribute to the stock market and in many cases such
contribution turns the stock market to a negative territory (as in the cases of Argentina,
15
Brazil, Chile, Estonia, Hungary, Indonesia, S. Africa and Turkey). Such findings tentatively
imply that movements in the domestic economy are not reflected in these countries’ stock
markets and may pose huge difficulties for firms to obtain financing to fulfil their capital
spending plans. In other words, there is a disconnection between a country’s economy and
stock market and such a disconnection typically renders economic activity (consumption,
investment and saving, for example) costly (inefficient) for households, businesses and the
government alike.
B. Panel Results
In this section, we report some preliminary and the main results from the estimations
of the various panel models. These results are shown in Tables 4 and 5, respectively.
Specifically, we first conducted a panel unit root test, the results of which are shown in Panel
A of Table 4, and then a panel (multivariate) cointegration test, the findings of which are
reported in Panel B of Table 4. Finally, we estimated six different panel models by
augmenting the benchmark models (I), each with GDPG growth or GFCF growth as the
dependent variable, with additional variables as well as interaction terms, depicted in Table 5
(in two panels).
2 We omitted the results from the group t statistics because they were similar.
3 The test was also conducted with the short-term rate in lieu of the long-term rate and the rate of inflation but
the results were qualitatively the same. Thus, they are omitted from the analysis but are available upon request.
18
that economic growth can induce stock market development as long as they are part of the
whole economic/financial system and never on its own.
C. Discussion of Findings
We have seen that when enriching the stock market – real economic activity
relationship with a set of control variables and estimating various panel specifications,
strong, dynamic interactions between the two magnitudes emerged. We found that, even
after controlling for other factors such as gross fixed capital formation, interest rates and
inflation rates, the stock market is positively and robustly correlated with contemporaneous
and future real economic development. Thus, stock market movements directly contributed
to a country’s economic development either through the production of goods and services
or the accumulation of real capital. In addition, in view of the significance of the interest
rates in these regressions it can be inferred that banking development also contributed to the
fostering of economic growth albeit in a different manner. Thus, in order to understand the
linkage between the financial (i.e., the stock market) and the real sector (economic activity or
public capital formation) of an emerging economy, it is important to include also the
banking sector because each sector provides different service bundles to the real economy
(see, Levine, 1996, and Levine and Zervos, 1996, 1998).
In sum, we observed a strong linkage between stock market development and
economic growth (chiefly proxied by GDP growth) for the emerging countries examined
here. However, we found that the stock market alone is not capable of boosting economic
development in these countries unless being part of a comprehensive financial system (which
includes banks) as well as investment in real capital. For example, gross fixed capital
formation is seen to have a considerable, economic and statistical, effect on economic
growth. After all, fixed capital formation is investment in fixed assets financed with funds
raised in the equity market. Thus, it can be inferred that stock markets and the real economy
20
were closely related and that stock markets had indeed contributed to economic growth
during the last few decades.
The implications for economic policy of the significant linkage between the stock
market and real economic activity are as follows. First, stock markets, as stand-alone, are not
able to induce economic development in emerging economies unless accompanied by a
sound financial system which includes banking development. Second, provision of public
fixed investment is necessary to foster economic as well as financial development in
emerging economies. In other words, the financial sector must be able to facilitate real
economic development in order for overall economic development to take place. And third,
government authorities should strive to also promote real investment rather than financial
investments since in the absence of the latter, economic development cannot occur in the
country. In addition, economic growth is not sustainable without a sound and efficient
financial sector which must be supported with real (fixed) capital accumulation.
V. Robustness tests
In this section, we perform several robustness checks to ensure that our models
stand the test(s) of sensitivity analyses when using alternative proxies for economic
development, stock market and models. We begin with the re-estimation of the VAR models
using alternative proxies for the main variables and conclude with estimating alternative
panel-type models.
A. Alternative variables
In our main VAR models, we employed GDP and GFCF growth, as proxies for
economic development, and the stock market, as the proxy for the country’s financial
development. In this exercise, we use each country’s industrial production index as an
alternative measure of economic development, the market excess returns (derived by
subtracting each country’s risk-free rate) and real stock returns (derived by subtracting the
country’s inflation rate, based on the consumer price index), and adding two sets of
dummies, one for each continent the country is located in and the other on the financial
crisis of 2008. Specifically, we define four continent dummies: the first dummy takes the
value of 1, if a country is in Europe and 0 otherwise, the second takes the value of 1, if the
country is in the Americas and zero otherwise, the third takes the value of 1, if the country is
21
located in Africa and 0 otherwise, and the fourth continent dummy takes the value of 1, if
the country is located in Asia and 0 otherwise. Each continent dummy enters the model
separately.
In general, when employing the above-mentioned variable proxies for real and
financial development in each country, we did not find any qualitative differences from the
results presented in Table 3 (VAR models results).4 In Panel A of Table 6, we report the
results from the various panel specifications (Table 5) with each continent dummy included
when GDP growth was the dependent variable.5 The table reports only the findings for each
dummy with the main variable results remaining the same. As seen from the panel, all four
continent dummies emerged as statistically insignificant (the exception was the Asian dummy
for the benchmark panel model). These findings suggest that the continent (location) in
which a country is located does not entail a (statistically significant) reason for a country’s
higher or lower economic growth when countries are examined in the aggregate. Thus it may
be generalized that stock markets do not seem to promote higher or lower economic
development based on the geographic region at which a country is located.
VI. Conclusions
This paper re-examines the nature of the relationship between a country’s aggregate
stock market and general economic development for fourteen emerging economies for the
23
References
Atje, R., and Jovanovic, B., 1993. Stock markets development. European Economic Review 37,
632–640.
Arestis, P., Demetriades, P., Luintel, K.B., 2001. Financial development and economic
growth: the role of stock markets. Journal of Money Credit and Banking 33, 16–41.
Beck, T. 2002. Financial development and international trade: is there a link? Journal of
International Economics, 57, 107-131.
Binswanger, M., 2001. Does the stock market still lead real activity? An investigation for the
G-7 countries. Journal of Financial Markets and Portfolio Management 15, 15-29.
______, 2004. How important are fundamentals? Evidence from a structural VAR model
for the stock markets in the US, Japan and Europe. Journal of International Financial Markets,
Institutions and Money 14, 185-201.
Carlson, J.B., Sargent, K.H., 1997. The recent ascent of stock prices: can it be explained by
earnings growth or other fundamentals? Federal Reserve Bank of Cleveland Economic Review
33, 2nd quar., 2-12.
Chung, Y.-W., He, J. and Ng, L.K., 1998. What are the global sources of rational variation in
international equity returns? Journal of International Money and Finance 16, 821-836.
Cheung, Y-W., and L.N. Ng, 1998. International evidence on the stock market and aggregate
economic activity. Journal of Empirical Finance 5, 281-296.
Chung, H., Lee, B.-S., 1998. Fundamental and nonfundamental components in stock prices
of Pacific-Rim countries. Pacific-Basin Journal of Finance 6, 321-346.
Dawson, R.J., 2003. Financial development and growth in economies in transition. Applied
Economics Letters 10, 833–836.
Deb, S. G. and Mukherjee, J. 2008. Does Stock Market Development Cause Economic
Growth? A Time Series Analysis for Indian Economy. International Research Journal of Finance
and Economics 21, 142-149.
24
Demirgiig-Kunt, A. and Maksimovic, V. 1996. Financial Constraints, Uses of Funds, and
Firm Growth: An International Comparison. Mimeo, World Bank, 1996
Dickey, D. A., & Fuller, W. A. 1979. Distribution of the estimators for autoregressive time
series with a unit root. Journal of the American Statistical Association, 74, 427–431.
Engle, R. F., & Granger, C.W. J. 1987. Cointegration and error-correction: Representation,
estimation, and testing. Econometrica 55, 251–276.
Fama, E. 1990. Stock returns, expected returns and real activity. Journal of Finance 45, 1089–
08.
______. 1991. Efficient capital markets. Journal of Finance 46, 1575–1617..
Fry, M.J. 1995. Money, Interest and Banking in Economic Development, 2nd Edition.
The Johns Hopkins University Press, Baltimore, MD.
Geske, R., and Roll, R. 1983. The fiscal and monetary linkage between stock returns and
inflation. Journal of Finance 38, 1–33.
Harris, R.D.F. 1997. Stock markets and development: a re-assessement. European Economic
Review 41, 139–146.
Im, K., Pesaran, H. and Shin, Y. 1997. Testing for Unit Roots in Heterogeneous Panels.
Discussion paper, revised version, June, University of Cambridge, Cambridge, UK.
Johansen, S., 1991. Estimation and hypothesis testing of cointegrating vectors in Gaussian
vector autoregressive models. Econometrica 59, 1551–1580.
Kletzer, K. and Pardhan, P. 1987. Credit markets and patterns of international trade. Journal
of Development Economics 27, 27-70.
Kwiatkowski, D., Phillips, P. C. B., Schmidt, P., & Shin, Y. 1992. Testing the null hypothesis
of stationarity against the alternative of a unit root. Journal of Econometrics 54, 159–178.
Laopodis, N.T., 2006. Dynamic Interactions among the Stock Market, Federal Funds Rate,
Inflation, and Economic Activity. The Financial Review 41, 513-545.
______, 2011. Equity Prices and Macroeconomic Fundamentals: International Evidence,
Journal of International Financial Markets, Institutions and Money 21(2), 247-276.
Lee, B.-S., 1998. Permanent, Temporary and Nonfundamental Components of Stock Prices.
Journal of Financial and Quantitative Analysis 33, 1-32.
Levin, A. and Lin, C. 1993. ‘Unit Root Tests in Panel Data: Asymptotic and Finite-Sample
Properties’, Discussion paper, December, University of California, San Diego.
25
Levine, Ross, 1997. Financial Development and Economic Growth: Views and Agenda.
Journal of Economic Literature, 35 688-726.
Levine, R., and Zervos, S., 1998. Stock markets, banks and economic growth. American
Economic Review 88, 537–558
Ludvigson, S. and Steindel, C. 1999. How important is the stock market effect on
consumption? FRBNY Economic Policy Review 79(July), 29-51.
Malkiel, B. G. 1998. Wall Street moves Main Street. June 23, The Wall Street Journal.
Morck, R., Shleifer, A., and Vishny, R. W. 1990. The stock market and investment: Is the
market a sideshow? Brookings Papers on Economic Activity, 2, 157–202.
Naceur, S. B., and Chazaouani, S., 2007. Stock markets, banks, and economic growth:
Empirical evidence from the MENA region, Research in International Business and Finance 21,
297–315.
Pedroni, P. 1999. Critical values for cointegration tests in heterogenous panels with multiple
regressors, Oxford Bulletin of Economics and Statistics, Special Issue, 653-670.
______, 2000. Fully modified OLS for heterogenous cointegrated panels, Advances in
Econometrics, 15, 93-130.
______, 2004. Panel cointegration,. asymptotic and finite sample properties of pooled time
series tests with an application to the PPP hypothesis. Econometric Theory 20(3), 597-625.
Rajan, R.G. and Gingales, L., 1998. Financial dependence and growth. The American Economic
Review. 88(3, June), 559-586.
Ram, R., 1999. Financial development and economic growth: additional evidence. Journal of
Developing Studies 35, 164–174.
Rousseau, P.L., and Wachtel, P., 2000. Equity markets and growth: cross country evidence
on timing and outcomes. Journal of Banking and Finance 24, 1933–1957.
Shiller, R.J. Irrational Exuberance. Princeton University Press, 2nd edition, 2005.
Shleifer, A, and Vishny, R. W. 1986. Large Shareholders and Corporate Control. Journal of
Political Economy 96 (3), 461-88.
Singh, A. and Weiss, B. 1998. Emerging stock markets, portfolio capital flows and long-term
economic growth: micro and macroeconomic perspectives. World Development 26, 607-622.
26
Table 1. Descriptive Statistics
Panel A: GDP growth, Gross Fixed Capital Formation growth, change in nominal Short-term Rate
SlovRep Turkey
gdpg gfcfg ∆rate gdpg gfcfg ∆rate
Mean 0.0182 0.0153 -0.0861 0.0099 0.0673 -0.8533
Max 0.1104 0.2061 3.4261 0.0491 0.2210 41.181
Min -0.0881 -0.2281 -4.2340 -0.0602 -0.0821 -37.151
SDev 0.0213 0.0675 1.1502 0.0219 0.0735 8.2232
Notes: growth rates are computed using the following formula: ln(Pt/Pt-1)*100, where Pt is either GDP or
GFCF; ∆ denotes change; StDev is the standard deviation; period is 1995:II to 2014:IV.
28
Notes: Panels A and B: 5% critical value for the ημ is 0.463; the null of ADF is non-stationarity, while that of the
KPSS is stationarity, against their respective alternative hypotheses; the reported test statistics are computed
using a lag length of 4;. Panel C: ADF numbers are the Augmented Dickey–Fuller pseudo t-statistics for testing
the null hypothesis that θ = 0 in Eq. (4); the 5% critical value is −3.37 (see Engle & Yoo, 1987, p. 157); k’s lag
length (4) is selected so as the Ljung–Box Q-statistic fails to reject the null of no serial correlation in the
residuals of Eq. (4); * denotes statistical significance at the 5% level.
29
R2-bar 0.1988 0.1659 0.4536 0.0449 0.0892 0.1097 0.4978 0.0756
Slov Rep Turkey
∆GDPt-1 0.2812* 0.3217 0.1337 -1.1211
(0.103) (0.181) (0.116) (0.914)
∆GDPt-2 0.1729* 0.2215 0.0908 -0.2859
(0.077) (0.151) (0.072) (0.122)
∆SPt-1 0.0397** 0.4918* 0.0531* 0.3440*
((0.019) (0.105) (0.005) (0.102)
∆SPt-1 -0.0241 -0.0256 -0.0110 -0.0816
(0.013) (0.021) (0.010) (0.063)
Constant 0.0096* -0.0745 0.0048 0.0621**
(0.002) (0.054) (0.003) (0.033)
R2-bar 0.2018 0.2649 0.2366 0.1149
Panel B: ∆GFCF and ∆SP variable pair
Argentina Brazil Chile Czech Rep
∆GFCF ∆SP ∆GFCF ∆SP ∆GFCF ∆SP ∆GFCF ∆SP
Variable Coefficient
(Std. error)
∆GDPt-1 0.3217* 0.3897 0.0517 -0.8801* 0.2956* 0.1156 0.1462 0.7744*
(0.123) (0.361) (0.046) (0.424) (0.116) (0.102) (0.114) (0.566)
∆GDPt-2 0.1529 -0.1145 -0.2139 -0.1159 0.0107 -0.3011 -0.1576* 0.3467
(0.107) (0.104) (0.110) (0.102) (0.010) (0.245) (0.108) (0.241)
∆SPt-1 0.0021 0.0478 0.0769* 0.3250* 0.1676* 0.3438* 0.0876* 0.3659**
((0.014) (0.035) (0.052) (0.122) (0.080) (0.107) (0.041) (0.121)
∆SPt-1 0.1571* -0.1216 0.0586 -0.0226 0.0881 -0.1266 -0.0115 -0.1725
(0.010) (0.087) (0.040) (0.023) (0.067) (0.115) (0.010) (0.143)
Constant 0.0130 0.0025 0.0240* 0.0481* 0.0088 0.0135 0.0078* -0.0180
(0.012) (0.020) (0.010) (0.024) (0.063) (0.011) (0.004) (0.016)
R2-bar 0.4078 0.2009 0.1766 0.1395 0.2092 0.1567 0.1078 0.1876
30
Slov Rep Turkey
∆GDPt-1 -0.1062 0.3097* 0.3837* 0.5811
(0.103) (0.151) (0.116) (0.414)
∆GDPt-2 0.1922** -0.5021 0.2508* -0.1359
(0.107) (0.451) (0.102) (0.122)
∆SPt-1 0.1976** 0.5518* 0.1431* 0.2740*
((0.089) (0.115) (0.005) (0.121)
∆SPt-1 0.0311 -0.0696 -0.0041 -0.2316
(0.023) (0.041) (0.010) (0.163)
Constant 0.0116 -0.0014 0.0128 0.0381
(0.010) (0.014) (0.013) (0.023)
R2-bar 0.1518 0.2943 0.6066 0.1289
Note: *, ** denote statistical significance at the 5 and 1% levels, respectively; R 2-bar is the adjusted R-square.
Table 4. Panel Unit Root and Cointegration Results
Ln(SP)
With individual intercept 0.75 Do not reject unit root null
With individual intercept and trend 1.96 Do not reject unit root null
Ln(GFCF)
With individual intercept -2.41 Do not reject unit root null
With individual intercept and trend -3.67 Do not reject unit root null
IR
With individual intercept -0.41 Do not reject unit root null
With individual intercept and trend 0.80 Do not reject unit root null
Notes: VR, non-parametric variance ratio statistic; rho, non-parametric test statistic analogous to the Phillips
and Perron (PP) rho statistic; PP, non-parametric statistic analogous to the PP t statistic; ADF, parametric
statistic analogous to the augmented Dickey-Fuller statistic; all statistics are distributed as standard normal;
rejection of the null of no cointegration is one-sided and involves: VR, large positive values imply cointegration
(at 5% significance, reject null of no cointegration if V > 1.645); the other three, large negative values imply
cointegration (at 5% significance, reject null of no cointegration if statistic < −1.645); ‡ null of no cointegration
is rejected at the 1% level; † null of no cointegration is rejected at the 5% level.
31
Table 5. Panel Models Results
Panel A: Dependent variable; GDP growth
Variable I II III IV V VI
Variable I II III IV V VI
Notes: I, II, III, IV, V, and VI are alternative panel specifications; *, **, *** denote statistical significance at the 5, 10 and
1% levels, respectively; the cross-section χ2 value tests for the appropriateness of the random effects model.
33
Table 6. Robustness Tests Results
34
∆IRit-1 ------- -------- -------- -0.0022 -0.0016 0.0018
(0.029) (0.002) (0.022)
13 14
12
12
11
10
10
8
9
6
8
4
7
6 SP 2 SP
GDP GDP
5 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
12 12
10 10
8 8
6 6
4 4
SP SP
GDP GDP
2 2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Estonia Hungary
14
11
10 12
9
10
8
8
7
6 6
5
4
4
2
3 SP SP
GDP GDP
2 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Iceland India
10 16
14
9
12
8
10
7
8
6 SP
GDP 6
5
4
SP
GDP
4 2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Indonesia Mexico
16 16
14 14
12
12
10
10
8
8
6
6
4
4 2
SP SP
GDP GDP
2 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
35
Poland S Africa
14 14
12 12
10 10
8 8
6 6
4 4
SP SP
GDP GDP
2 2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
11 14
10 12
9 10
8 8
7 6
6 4
5 2
4 SP 0 SP
GDP GDP
3 -2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Figure 2. Impulse Responses: Impact of the stock market (SP) on economic growth (GDP)
.006
.015 .006
.03
.015 .015
.02
.010 .010
.01
.005 .005
.00
.000 .000
-.01
.010
.008 .005
.008
.004
.006
.006
.003
.004 .004
.002
.002
.002
.001
.000
.000
-.002 .000
36
.020 .025
.020
.015
.015
.010
.010
.005
.005
.000
.000
-.005 -.005
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Figure 3. Impulse Responses: Impact of economic growth (GDP) on the stock market (SP)
.20 .12
.06
.16
.08 .04
.12
.08 .02
.04
.04
.00
.00 .00
-.02
-.04
-.04
-.08 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
.10 .12
.15
.08
.08
.06
.10
.04
.04
.02 .05
.00 .00
.00
-.02
-.04
-.04 -.05
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
.12
.15 .12
.08
.10 .08
.04
-.04
.00 .00
-.08
-.05 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
.04
.02
.04
.02
.00
.00
.00
-.02
-.02
37
.12 .25
.10 .20
.08 .15
.06 .10
.04 .05
.02 .00
.00 -.05
-.02 -.10
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Figure 4. Impulse Responses: Impact of the stock market (SP) on gross fixed capital formation (GFCF)
.04 .05
.06
.03 .04
.04
.02 .03
.00 .01
.00
-.01 .00
.04
.06
.08
.03
.04
.04
.02
.02
.01
.00
.00
.00
-.04
-.02
-.01
38
.028 .025
.05
.024 .020
.04
.020
.015
.03 .016
.010
.02 .012
.005
.008
.01
.000
.004
.00 -.005
.000
.06 .05
.04
.04
.03
.02
.02
.00
.01
-.02
.00
-.04 -.01
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Figure 5. Impulse Responses: Impact of gross fixed capital formation (GFCF) on the stock market (SP)
.20 .12
.06
.16
.08
.04
.12
.04
.08 .02
.00
.04
.00
.00 -.04
-.02
-.04
-.08
-.08 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
.10 .15
.12
.08
.10
.06 .08
.05
.04
.04
.02 .00
.00
.00
-.05
-.02
.12
.08 .12
.08
.04 .08
.04
-.04
-.04 .00
-.08
-.08 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
39
.12 .16 .12
.10 .10
.12
.08 .08
.06 .06
.08
.04 .04
.02 .04
.02
.00 .00
.00
-.02 -.02
.10
.15
.08
.10
.06
.04 .05
.02
.00
.00
-.05
-.02
-.04 -.10
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Appendix
40