Stock Market Development and Economic Growth: Empirical Evidence from Upper Middle Income Countries and Lower Middle Income Countries

Abstract

The study aimed to analyze the relationship among stock market development and economic growth of upper middle income countries and lower middle income countries. These countries are selected as per the basis of gross national income. Panel data has been used in study for the period of 1995 to 2015. Gross domestic product is taken as the dependent variable and the independent variables of the study are stock market capitalization, financial depth, trade openness, inflation and foreign direct investment. Data is taken for 10 upper middle income countries that included Turkey, Malaysia, Mexico, South Africa, Thailand, Sri Lanka, Argentina, Mauritius, Peru and Brazil, and 10 lower middle income countries that are Philippines, Pakistan, Indonesia, Gaza, Bangladesh, Mongolia, Nigeria, Kenya, India and Ghana’ from the World Development Indicators. The results of the study after applying fixed effect regression model under Hausman specification test revealed that for both upper middle income and lower middle income countries the stock market casts significant positive impact on economic growth. Moreover, for upper middle income economies, financial depth has negative significant, foreign direct investment has positive significant, Inflation has negative insignificant and trade openness has positive insignificant relationship with economic growth. For lower middle income countries, financial depth and foreign direct investment both have positive significant relationship with economic progress. Whereas inflation and trade openness holds negative insignificant relation with economic growth. Keeping in view the empirical findings of the study, it is suggested that the policy makers need to formulate effective and prudent policies in order to expand stock markets in upper middle income countries and lower middle income countries.