Financial Intermediation and Stock Market Activity Growth: A Causality- Co-Integration Approach

Dr. Manoj S. Kamat ., Dr Manasvi .

Abstract


The nexus between stock market growth and its intermediary developments with the economic activity for India is investigated over the post-liberalization period ranging 1993-2011. Using Unrestricted Vector Auto Regression (VAR) based on Error Correction Models (ECM). Both in the short term and the long term models we illustrate the short run relationship of the time-series properties relating stock market development and the intermediation growth relations. The coherent picture which emerges from Granger-causality test based on Vector Error Correction Model (VECM) reveals that in the long run, stock market development Granger-causes financial infrastructural growth. Our findings suggest that the evolution of the stock market tends to, or is more likely to stimulate and promote economic growth when monetary authorities adopt liberalized investment and openness policies, improve the size of the market and the de-regulate the stock market. The capital market intermediation development indicators have a highly positive causation coefficient with the capital market economic activity implying that they have developed together in the Indian economy.

Keywords


Stock Market, Growth, Investor, Financial Innovations, Infrastructure Development, Causality, Cointegration, VAR, VECM, India.

Full Text:

PDF

References


Arestis, P. and Demetriades, P. 1997. “Financial Development and Economic Growth: Assessing the Evidence”. The Economic Journal, 107(May): 783-799.

Bencivenga, Valerie et Smith, Bruce, 1991. “Financial Intermediation and Endogenous Growth”. Review of Economic Studies, 58:195-209.

Bhole, L. M. 1999. Financial Institutions and Markets: Structure, Growth and Innovations. 3rd Edition. New Delhi: Tata McGraw-Hill Publishing Company Limited.

Boyd, J. H. and Smith, B. D. 1995. “The Evolution of Debt and Equity Markets in Economic Development”. Draft, Federal Reserve Bank of Minneapolis.

Demetriades, P. and Hussein, K. A. 1996. “Does Financial Development Cause Economic Growth? Time-series Evidence from 16 Countries”. Journal of Development Economics, 51: 387-411.

Demetriades, P. and Luintel, K. 1996. “Financial Development, Economic Growth and Banking Sector Controls: Evidence from India”. The Economic Journal, 106: 359-374.

Demirguc-Kunt A. and Levine, R. 1996. “Stock Markets, Corporate Finance and Economic Growth: An Overview”. World Bank Economic Review, 10.

Demirguc-Kunt, A. and Maksimovic, V. 1996. “Stock Market Development and Financing Choices of Firms”. World Bank Economic Review, 10.

Engle, R. and Granger, C. W. J. 1987. “Co-integration and Error-correction: Representation, Estimation and Testing”. Econometrical (55): 251-276.

Granger, C. W. J. 1969. “Investigating Causal Relations by Econometric Methods and Cross-Spectral Methods”. Econometrical, 37, 424-438.

Granger, C. W. J. 1980. “Testing for Causality: A Personal Viewpoint”. Journal of Economic Dynamics and Control, 2,329-352.

Granger, C. W. J. 1981. “Some Properties of Time Series Data and their Use in Econometric Model Specification”. Journal of Econometrics, 16, 121-130.

Granger, C. W. J. 1988. “Granger Causality, Co-integration, and Control”. Journal of Economic Dynamics and Control, 12: 551-59.

Greenwood, J. and Smith, B. 1997. “Financial Markets in Development, and the Development of Financial Markets”. Journal of Economic Dynamic and Control, 21: 145-181.

Johansen, S. 1988. “Statistical Analysis of Co-integrating Vectors”. Journal of Economic Dynamic and Control, 12: 231-254.

Johansen, S. and Juselius, K. 1990. “Maximum Likelihood Estimation and Inference on Cointegration with Application to the Demand for Money”. Oxford Bulletin of Economics and Statistics, 52: 169-210.

Johansen, S. and Juselius, K. 1992. Some Structural Hypotheses in a Multivariate Cointegration Analysis of Purchasing Power Parity and the Uncovered Interest Parity for UK. Denmark: University of Copenhagen.

Jung, W. S. 1986. “Financial Development and Economic Growth”. Economic Development and Cultural Change, 34: 336-346.

King, R. and Levine, R. 1993. “Financial Intermediation and Economic Development” in Financial Intermediation in the Construction of Europe, ed. by Colin Mayer and Xavier Vives, PP. 156-89.

King, R. and Levine, R. 1993b. “Finance, Entrepreneurship and Growth: Theory and Growth”. Journal of Monetary Economics, 32(Dec): 513-542.

Kul B. L. and Khan, M. 1999. “A Quantitative Reassessment of the Finance growth Nexus: Evidence from a Multivariate VAR”. Journal of Development Economics

Levine, R. 1997. “Financial Development and Economic Growth: Views and Agenda”. Journal of Economic Literature, 25(June): 688-726.

Levine, R. and Zervos, S. 1996. “Stock Market Development and Long-run Growth”. World Bank Economic Review, 10, PP.323-339.

Levine, R. and Zervos, S. 1998. “Stock Markets, Banks and Economic Growth”. American Economic Review, Volume 8: 537-558.

Luintel, K.B. and Khan, M. 1999. “A Quantitative Reassessment of the Finance-Growth Nexus: Evidence from a Multivariate VAR”. Journal of Development Economics, 60, 381-405.

MacKinnon, J. G. 1991. “Critical Values for Co-integration Tests.” In Long Run Equilibrium Relationships: Readings in Co-integration, edited by R. F. Engel and C. W. Granger. Oxford: Oxford University Press.

Murinde, V. et F. Eng 1994, “Financial Development and Economic Growth in Singapore: Demand-following of Supply-leading ?” , Applied Financial Economics, 4, 391-404

Nagraj, R. 1996. “Indian Capital Market Growth: Trends, Explanations and Evidences”. Economic and Political Weekly, 33 (14-20 March)

Nagaishi, M. 1999. “Stock Market Development and Economic Growth”. Economic and Political Weekly, July 17, 1999, PP.2004-2012.

Pagano, M. 1993. “Financial Markets and Growth: An Overview”. European Economic Review, 37(Apr): 613-622.

Phillips, P.C.B. & Perron, P. 1988. “Testing for a Unit Root in Time Series Regression,” Biometrika, 75, 335-346.

Pindyck. R. S., and Rubinfeld, D. L. 1998. “Econometric Models and Economic Forecasts,” 4th Ed. New York: McGraw-Hill.

Schumpeter, J. A. 1912. “Theorie der Wirtschaftlichen Entwicklung” (The Theory of Economic Development ). Leipzig: Dunker& Humblot, Translated by Redvers Opie, Cambridge, MA: Harvard University Press, 1934.

Shah, A. 1998. “The institutional development of India’s financial markets”, in T.Waghmare, ed., ‘The future of India’s stock markets’, Tata McGraw Hill, chapter 3, pp. 21–39.

Shah, A. & Thomas, S. 1996. How automation and competition have changed the BSE, Technical report, Centre for Monitoring Indian Economy.

Sims, C. A. 1972. “Money Income and Causality” American Economic Review, (62): 540-552.

Singh. A. 1997. “The Stock Market, Industrial Development and the Financing of Corporate Growth in India” in D.Nayyar (ed) Trade and Industrialisation, Delhi: Oxford University Press.

Singh. A. 1998. “Liberalisation, the Stock Market and the Market for Corporate Control: A Bridge Too Far for the Indian Economy”, in I. J. Ahluwalia and I.M.D. Little (eds), India’s Economic Reforms and Development: Essays for Manmohan Singh, New Delhi: Oxford University Press.

Toda, H. and P.C.B. Phillips 1993. “Vector Auto-regressions and Causality” Econometrical, 61:1367-1393.


Refbacks

  • There are currently no refbacks.




Editorial Office:

Educational Research Multimedia & Publications,
S.N. 21, Plot No 24, Mirza Ghalib Road Malegaon Nasik,
Maharashtra India - 423203.
+919764558895 (whatsapp),
editor@scholarshub.net, www.scholarshub.net

Copyrights © 2010-2020 - ERM Publications, India     

This work is licensed under https://creativecommons.org/licenses/by-sa/4.0/