Massomeh Hajilee

Financial market development and trade openness: evidence from emerging economies

International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.

Banking sector development and interest rate volatility in emerging economies

Over the last decades, macroeconomic stability is said to be one of the major concerns of emerging economies. Financial sector as a core of macroeconomic stability has been under close consideration of policy makers. The relationship between interest rate uncertainty and banking sector development as one of the most important indicators of financial sector development, especially for emerging economies, has not received enough attention in the literature. Perhaps this article is the most comprehensive study that investigates the relationship between interest rate uncertainty and banking sector development for a large group of emerging economies. To do this, the short-run and long-run models using a bounds testing approach to cointegration for 12 emerging economies over the period 1980–2011 have been developed. Estimated results from all models indicate that interest rate uncertainty has significant effect on banking sector development in both short-run and long-run phenomena in the majority of countries. The findings indicate that the link between interest rate uncertainty and banking sector development in each country depends on each country’s specific structure.

The Relationship between Financial Market Development and Foreign Direct Investment in Latin American Countries

The main purpose of this paper is to assess the impact of financial market development on Foreign Direct Investment (FDI) in Latin American countries. Financial market development and FDI are two important sources of efficient economic resource allocation in the region. We use banking sector and stock market indicators to capture financial market development. By giving greater consideration to the short-run and long-run effects of financial market development on FDI, this paper presents empirical results from a time series model of 14 Latin American countries. We find financial market development link is both short-run and long-run phenomena in majority of countries. Furthermore, our result of the causality test shows that link between FDI and banking sector development is uni-directional and the link between FDI and stock market development is bi-directional.

Financial Depth and Exchange Rate Volatility

It is empirically well established that financial depth increases the power of the financial system and helps both government and the private sector to have access to adequate funds without a noticeable change in asset prices and exchange rates. Exchange rate uncertainty is considered one of the many factors that affect financial market performance. In this study, we try to determine the short-run and long-run effects of exchange rate volatility on financial depth in 26 selected countries, classified as developed, developing, and emerging economies over the period 1980-2011. Our findings indicate that exchange rate volatility has short-run and long-run effects in the majority of countries in this study. We found for 16 countries out of 26, financial depth responds significantly to exchange rate volatility (nine positive, seven negative). Furthermore, using the bounds testing approach shows that exchange rate volatility has significant impact on financial deepening in 20 out of 26 countries in the short run. The results show that despite similar classification and grouping, the estimated results could be very country specific depending on each country’s particular characteristics. We suggest that for every country, it is crucial to choose and implement appropriate financial market and exchange rate policies.

The Impact Of Interest Rate Volatility On Stock Market Development: Evidence From Emerging Markets

ABSTRACT:Interest rate uncertainty has adverse effects on stock market performance. Despite the considerable studies on the relationship between interest rate and stock market return, the relationship between interest rate volatility and stock market development still is enigma. This paper investigates the effect of interest rate uncertainty on stock market development. We examine the long-run and short-run relationship between these variables using Pesaran et al (2001) bounds testing approach to cointegration and error-correction modeling for 12 emerging economies over the period 1980-2011. This methodology has two main advantages over other cointegration methods which have made it unique: first there is no need to do pre-unit root resting, which is an essential requirement in other methods, and second, we are able to distinguish short -run effects from its long- run effect. Diagnostic statistics applied in this study indicate that our models are stable, well specified and normally distributed residual free of autocorrelation. The estimated results here show a significant short-run effect of interest rate uncertainty on stock market developing in all of 12 emerging economies under study. Furthermore, our results indicate that in 9 out of 12 countries the short-run effects have been seen in the long-run as well, and the cointegration relationship is confirmed in almost all of the models by either the F-test results or negative sign of error correction term. Also, the long run real income estimated elasticity is significantly positive in all countries (except for Brazil, Chile and Thailand) which would be a major long-run factor affecting stock market development in most of emerging economies in this study. Moreover, we found a mixed long- run effect of interest rate on stock market development. The results obtained in this paper suggest that emerging economies need to be cautious in implementing financial market and interest rate policies. A well-developed financial system improves capital formation and the efficiency of resource allocation, enhancing investment, and therefore economic growth. Interest rate uncertainty significantly affects stock market development. Therefore, a sound monetary policy creates a safer investment environment and stock market development. The role of stock market development towards achieving economic growth is crucial.