Poverty Reduction and Stock Market Development: Evidence from Africa

Abstract

Despite the increased number of stock exchanges in Africa, this segment of the financial market remains underdeveloped with low market capitalization, volume and illiquidity. Furthermore, the aftershock of the 2008 financial crisis exacerbates the poor market condition with the attendant decrease in investment. Efforts of previous policies to promote stock market development and restore investors’ confidence did not yield a positive outcome as they are yet to meet the rising demand for capital needed by domestic firms. This paper examines the relationship between poverty reduction and stock market development in Africa, using the pooled mean group (PMG) model for the sample period of 1996 to 2016. The findings suggest poverty reduction has a positive effect on stock market development both in the long-run and short-run estimates. For policy prescription, the government of the respective countries should implement programs that will promote financial inclusion and alleviate poverty to promote domestic investment in stock markets in the region.

Keywords: Africa, Financial market, PMG model, Poverty reduction, Stock market development

JEL Classification: G12, G21, G32, E43