Economy: The Stock Market

The stock market is a common feature of a modern economy and is expected to promote economic growth and development of an economy. It is also a sign of the stock market as a specific stock. It provides gesture to the investors about their future moves. As financial domain is the most important one of an economy, so the stock market performance works as an indicator of the overall health of the economy.

Gurley and Shaw (1955) are among the leading to study the relationship between financial markets and real sector activity. They explain that one of the difference between developed and developing countries is that the financial system is more developed in the beginning. McKinnon (1973) and Shaw (1973) found that the development of financial

Nelson (1976) also studied on macroeconomic variables which is expected rates of inflation and unexpected changes in the rate of inflation, results found that inflation do negatively influence the stock returns.

Moreover, Yartey (2008) examined the institutional and macroeconomic variables that underwrite to stock market development. Through employing panel data of 42 emerging economies covering the period between 1990 and 2004, he found that income level, gross domestic investment, banking sector development, private capital flows, and the liquidity of stock markets are fundamental determinants of stock market development. He also confirms that political risk, law and order, and administrative quality are important causes of stock market development, as they enhance the viability of external

However, this improves the resource allocation. Greenwood and Smith (1997) pressure that a stock exchange reduce the cost associated with pulling fund from various sources into the area where it is will invest. Therefore, this enables the making of goods and services that ultimately lead to improvement economic growth. In a nutshell, this shows that when market is competitively working in the economy, the stock market influence to organizations financing will rise more than the influence of the bank-based financial sector.

The nature and economic significance of the relationship between stock market development and growth differ according to a country’s level of economic development with a larger impact in less developed economies (Filler, Hanousek and Campos, 1999). The exponents of positive relationships between stock market development and economic growth hinged their argument on the fact that the stock market helps economic growth and development through the organization and distribution of savings, risk diversification, liquidity creating ability and corporate governance improvement among