The Growth in Equity Market Size and Trading Activity: An International Study
University of British Columbia (UBC) - Sauder School of Business; China Academy of Financial Research (CAFR)
Journal of Empirical Finance, Vol. 14, pp. 59-90, 2007
This paper presents new evidence on the role of macroeconomic and institutional factors in equity market development and on the sources of equity market growth. Using panel data on 33 countries, I find that development of financial intermediaries and trade openness are positively associated with equity market size, and that development of financial intermediaries is also positively associated with the level of activity in equity markets. Government consumption is negatively associated with equity market activity. I construct a direct estimate of the effect of institutional factors on equity market development that compares a country's actual level of development to a hypothetical "best-practice" country having the same macroeconomic fundamentals as the original country. I show that the level of equity market development of an average country is around 30% below its maximum potential. There are wide differences in institutional characteristics across countries and over time, and Canada, the United States, and Singapore possess the most shareholder-friendly institutional frameworks that foster larger and more active equity markets. It appears that institutional improvements and changes in financial technology have provided the major impetus for the phenomenal expansion of global equity markets.
Number of Pages in PDF File: 32
Keywords: Laws and institutions, Value traded, Turnover, Stochastic frontier, Bayesian inference
JEL Classification: G15, G18, C11, C15
Date posted: February 22, 2007