Abstract:
PURPOSE – The purpose of this paper is to examine the nature of causal relations between
banking sector maturity, stock market maturity, and four aspects of performance and operation
of the economy: economic growth, inflation, openness in trade, and the degree of government
involvement in the economy.
DESIGN/METHODOLOGY/APPROACH – The authors look for possible links between the variables by
conducting panel cointegration and causality tests, using a large sample of Asian countries over the
period 1960-2011. Novel panel data estimation methods allow for robust estimates, using both
variation between countries and variation over time.
FINDINGS – The study identifies interesting causal links among the variables deriving uniquely from
our innovations. In particular, The paper finds that for all regions considered, banking sector maturity
and stock market maturity are causally linked, sometimes in both directions. Furthermore, stock
market maturity may lead to economic growth, both directly and indirectly through indicators such as
inflation and trade openness. The findings also support the notion that economic growth affects the
maturity of the stock market in most regions.
PRACTICAL IMPLICATIONS – The results lend support to the notion that a mature financial sector is a
key contributor to generating economic growth. Furthermore, economic growth itself has the potential
to bring about maturity in the financial sector.
ORIGINALITY/VALUE – The paper uses sophisticated principal-component analysis, panel cointegration,
and Granger causality tests, methods not used in this literature before. The method was applied to
recent data pertaining to 35 Asian countries – a group of countries that has previously not been
adopted in this literature.
