Understanding the Growth in Emerging Stock Markets

Abstract

This article investigates the relationship between stock market growth and economic growth, financial liberalisation policies, foreign portfolio investment and country risk in 40 emerging economies between the period 1980–2000. Two Stages Least Squares combined with Fixed Effect technique are employed. The results suggest that economic growth, financial liberalisation policies and foreign portfolio investments were the leading factors of the emerging stock markets growth. This seems to validate the demand-following hypothesis suggesting that economic growth has indeed activated stock markets in these countries. In addition, the findings imply that stock markets development and expansion is a multifaceted process.