The Determinants of Stock Market Development in the MENA Region

Abstract

Since few decades, a wide theoretical debate is concerned with the fundamental relationship between financial development and economic growth. An efficient financial system leads to a sustainable economic growth. In this study, we are interested especially with stock markets as a main component of the financial system according to the increasing role of financial markets in economies. So, their evolution plays an important role in economic growth. We shed some light on the macroeconomic determinants which must have an important influence on stock markets development. It is recognized that real or financial variables such as real income, saving rate, credit to private sector, M3, value traded, turnover, etc. could have a significant impact on market capitalization. The empirical study is conducted using an unbalanced panel data from twelve MENA region countries. Econometric issues are based on estimation of some fixed and random effects specifications. With such specifications in mind, peculiarities of MENA region countries are detected as well as differentiations among them. Thus, differences in market capitalization are explained. The empirical expected results must reinforce the idea which suggest the important role of economic development in promoting stock market development. Explaining power of variables such as real income, saving rate, inflation, financial intermediary development and stock market liquidity is confirmed. Banks and stock markets seem to be complements instead of substitutes.

Keywords: stock market development, fixed effects model, random effects model, MENA region