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Determinants of stock market development: a review of the literature

Sin-Yu Ho (University of South Africa, Pretoria, South Africa)
Bernard Njindan Iyke (University of South Africa, Pretoria, South Africa)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 6 March 2017

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Abstract

Purpose

This paper aims to provide a comprehensive review of the literature on the determinants of stock market development.

Design/methodology/approach

The paper divides the existing studies into the theoretical and empirical literature. Then, it analyses these studies in turn.

Findings

Based on the theoretical literature, the determinants of stock market development can be broadly classified into two groups: macroeconomic factors and institutional factors. The theory and the empirics predict different ways in which macroeconomic factors affect stock market development. The real income and its growth rate foster stock market development, while the banking sector, interest rate and private capital flows can foster or inhibit it. Inflation and exchange rates have adverse effects on stock market development. In terms of the institutional factors, the literature indicates that different legal origins and stock market integration can have a positive or negative impact on stock market development. In addition, factors such as legal protection of investors, corporate governance, financial liberalisation and trade openness contribute positively to the development of the stock market.

Research limitations/implications

From the survey, it is imperative that policies which aim at enhancing institutional quality, financial integration, real income growth, macroeconomic stability and capital inflows, among others, will certainly promote stock market development within and across countries. Although the empirical studies have incorporated a large set of variables in their models, the theoretical studies do not contain rich models of stock market development. It is understandable that a theoretical model which contains a large set of the determinants of stock market development may be difficult to solve. However, such a model seems very appealing and will provide a unification of the existing literature.

Originality/value

The originality of the paper lies in the fact that it is the first to undertake a survey of the determinants of stock market development in the literature. It is hoped that this paper will spur further theoretical and empirical research on the determinants of stock market development.

Keywords

Acknowledgements

The authors thank the Editor, Prof. Niklas Wagner, and an anonymous referee for their helpful comments and suggestions which have improved this paper substantially. All remaining shortcomings are ours.

Citation

Ho, S.-Y. and Njindan Iyke, B. (2017), "Determinants of stock market development: a review of the literature", Studies in Economics and Finance, Vol. 34 No. 1, pp. 143-164. https://doi.org/10.1108/SEF-05-2016-0111

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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