British Journal of Economics, Finance and Management ...2)/EFVol.11 (2) Article 2.pdf · March 2016, Vol. 11 (1) ... booming and technologically intensive market in the world economy

British Journal of Economics, Finance and Management Sciences 13

March 2016, Vol. 11 (1)

© 2016 British Journals ISSN 2048-125X

The Comparative Analysis of the Factors Affecting Securities Market of the Developed and

Emerging Economies: BRICS and Ukraine Case

Hnatyuk Rostyslav

PhD Student

Ivan Franko National University of L’viv

E-mail: [email protected]

Abstract

In the article we inquire into the international securities market which is a source of financial

development for the major part of the world economy. We perform linear correlation analysis in order to

determine the influence of the macroeconomic and institutional factors on the microstructural (internal)

determinants of securities market. We attempt to compare the results across developed and emerging

economies in order to find out the differences. We found that most of the relationships are consistent with

the theory. We also discovered that for development of emerging economies securities market the role of

institutional environment is much more important than macroeconomic indicators, whereas for developed

countries good performance of both is mostly equally essential.

Key words: institution, institutional factors, macroeconomic variable, securities market determinants

Introduction

The securities market is one of the most important sources of financing for most of the companies

in developed countries and quiet important for those from emerging economies. It allows accumulation of

vast amounts of financial resources relatively quickly and without attaching yourself to a particular bank

therefore allowing development of a particular project. In the last decades it is securities market that

became one of the most quick – booming and technologically intensive market in the world economy.

Since the beginning of XX economists believed that financial development may give an impetus for the

national economy growth. That is when scholars around the world started to research on what exactly

stimulates development of financial sector of economy and, particularly, securities market.

There is a vast volume of literature on the matter, but it is generally believed that there are specific

factors that influence securities market. We could unite all those factors in two big groups (El – Wassal,

2005): institutional and macroeconomic (which include factors of demand, supply and economic policies)

factors.

Scholars were always debating on the direction of the relationship between macroeconomic factors

and financial sector development indicators: whether it is a stable development of the national economy

that stimulates the rise of financial sector, or, perhaps, a strong financial market is a solid background for

the further economic growth (Kominek, 2003). Today we already know that both affect each other and

that sound economic policies require support of financial market, as well as the latter would not be able to

flourish without the former (Garcia, 2009). Thus securities market, as one of the most important part of

the financial market, is always influenced by macroeconomic and institutional factors. We strongly

believe that they define its path of development and that more information on those relationships could

give us more understanding and make policy implications.

The development of the securities market is a multilateral process: there are certain criteria that

determine its state. We propose to call them microstructural indicators. These are all indicators that define


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the internal performance of the securities market: volume, volatility, liquidity, concentration, indices etc.

It is them, and the processes that they underline, that are influenced by institutional and macroeconomic

factors. In this article we will perform an analysis to understand how macroeconomic and institutional

environment affect microstructural indicators of securities market.

Literature review

There is a vast body of literature devoted to macroeconomic determinants of securities market

development. The majority of scholars in the literature reviewed believe that the main macroeconomic

indicators of securities market are GDP, inflation and unemployment rate, interest rates, money supply,

exchange rate, savings rate and foreign direct investment (FDI) (Tripathy, 2011). However, some

professionals who work in the sphere of finance reckon that it is futile to seek for a one particular

criterion that would completely and unambiguously explain the securities’ market movements as the

market situation is the result of the influence of different interrelated macroeconomic and institutional

indicators (Sandte, 2012).

Gross domestic product (GDP) and its increase published monthly, quarterly or annually describes

economic activity in the country and the pace of economic growth itself. The increment of GDP usually

means general tendency for improvement of companies’ situation across all the industries which will,

ceteris paribus, boost their profits. This affects the behavior of the investors and, as the result, companies’

share prices will increase which creates a direct relationship between the GDP growth rate and securities

market microstructural indicators. On the other hand, GDP decrease means that consumers will limit their

consumption and profits will plunge. The securities market will respond with a decrease of share prices.

There is a lot of research done that gives empirical evidence in support of this statement. Levine and

Zervos in their extensive research of 41 countries from 1976 till 1993 confirm that there is a robust

relationship between real GDP per capita and stock indices. In fact, the analysis of corresponding

literature shows that this assertion would be true for India (Ray, 2012), South Korea, Malaysia,

Philippines, Zimbabwe (Kominek, 2003), Kazakhstan (Oskenbayev, 2001), Slovakia (Hsing, 2013), Iran

(Faez, 2014), Czech Republic (Hsing, 2011), Argentina (Hsing, 2012), Kenya (Barasa, 2014), Namibia

(Eita, 2012), Lithuania (Pilinkus, 2009), Brasilia (Silveira dos Santos, 2013), Bulgaria (Hsing, 2011). The

research of securities market of 12 countries of Eastern Europe (Ukraine among them) also showed

positive relationships (Kurach, 2010). On the other hand, there is no consistent result for Chile, Columbia,

Greece, Pakistan and Venezuela (Kominek, 2003). Additionally, the analysis performed by Virtus Mutual

Funds contradicts the previously mentioned findings: the relationship between per capita GDP and stock

prices in 16 developed countries from 1900 to 2000 is negative, whereas the same connection is positive

for developing countries (from 1988 to 2000). Analysts believe there may be many various explanations

to that: multinational corporations could gain profits abroad; securities market does not represent the

whole economics because there are still state companies and new firms, etc. To conclude, the relationship

between GDP and securities market is quiet ambiguous. One cannnot for sure define the direction of the

relationship: it differs from country to country and depends on the time period.

Concerning the inflation rate, the increment of the prices on resources will make companies’ costs

increase as well, that is why here it will depend on the elasticity of the market and how far might

company go in transferring its costs on potential companies. If the company succeeds, it could win a

competition, make profits grow and, therefore, securities prices as well. On the other hand, some

economists believe that sometimes inflation could directly affect the increase of the securities prices as

unexpected inflation may augment company’s value itself (Paulo R. S at all, 2006). It is generally

considered that inflation affects negatively the whole financial market, not only because it makes share


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prices plunge but also because it diminishes the return on investment. On the other hand, deflation will

positively affect financial market. There is empirical evidence on that. Al-Rjoub in his research of five

countries of the Middle East region found a robust negative statistical relationship between inflation and

stock prices (Mousa, 2012), as Oskenbayev for Kazakhstan (Oskenbayev, 2001). The analysis of Asian

securities market also correspond previous findings for Pakistan (Sohail, 2009), India (Patel, 2012; Naik,

2012), Sri – Lanka (Ray, 2012). The same is true for analogical research of the USA (Humpe, 2007),

Mexico, the United Kingdom, Italy, South Africa and Russia (Moazzami, 2010), Germany

(Masuduzzaman, 2012), Philippines (Murcia, 2014), Thailand (Forson, 2014), Iran (Faez, 2014), Czech

Republic (Hsing, 2011), Romania (Balint, 2010), Argentina (Hsing, 2012), Kenya (Barasa, 2014), Saud

Arabia (Kalyanaraman, 2014), Namibia (Eita, 2012), Kuwait (Al – Mutairu, 2007), Brazil (Silveira dos

Santos, 2013), Bulgaria (Hsing, 2011), Canada (Dadgostar), Sweden (Talla), China (Geetha, 2011). The

research of securities market of 12 countries of Eastern Europe (Ukraine among them) also showed a

negative relationship (Kurach, 2010). It is only in the case of Jordan that was not found any statistical

relationship (Mousa, 2012). As we see, almost in all the cases the strong statistical relationship is

negative.

The unemployment rate influence on securities market is rather ambiguous. On one hand, the

increment of the people unemployed means that the company theoretically is cutting the costs. On the

other hand, high redundancy means that national economy is working not as smooth as it should. Cutting

the costs by resigning people is one of the most distinctive features of the economic recession due to the

fact that it means not only overall unpleasant situation in the business, but also a decrease in the

purchasing power of consumers and, therefore, companies’ earnings. That will negatively affect securities

market. The research performed by John Boyd, however, shows that there is a bright side of the

unemployment: high unemployment rate means a forthcoming decrease of the interest rates which

positively affects securities market (Gonzalo, 2011). Nevertheless, it also has a dark side: drop in future

profits and dividends to be paid. According to Boyd, everything depends on the current business cycle: if

national economy is on the rise, the factor of decreased interest rates will overbalance the future profits

drop and the situation on the securities market will, in fact, improve. If the economy is in the decline, the

opposite will happen and securities market will soar dramatically. This was also approved by a different

research performed by Gonzalo and Taramonti. Negative relationship between unemployment and stock

market is observed in Romania (Balint, 2010), Lithuania (Pilinkus, 2009) and other countries. But

generally, it is impossible to straightforwardly define how unemployment rate influences securities

market as it depends on the current business cycle stage of the country.

There are also other factors that could potentially affect securities market. Interest rate is one of

them. The decrease in interest rates leads to the reduction of the costs of new borrowings which allows

companies to develop today with a hope to receive returns on investments in the future in the form of

profits (Tripathy, 2011). Obviously, this should rise the stock value. At the same time, the majority of the

investors borrow money to buy securities, which means that the increase in the interest rates will inflate

the cost of new borrowings for them and, therefore, decrease the demand on stocks and the securities

prices will plunge (Tripathy, 2011). This relationship was empirically confirmed by many research of the

following countries: India (Ray, 2012), Pakistan (Sohail, 2009), Sri – Lanka (Ray, 2012), Malaysia

(Vejzagic, 2013), Slovakia (Hsing, 2013), USA (Humpe, 2007), Czech Republic (Hsing, 2011),

Kazakhstan (Oskenbayev, 2001), Romania (Balint, 2010), Namibia (Eita, 2012), Kuwait (Al – Mutairu,

2007), Lithuania (Pilinkus, 2009), Brasilia (Silveira dos Santos, 2013), Sweden (Talla), Bulgaria (Hsing,

2011). The negative relationship was also approved in a research on developed and developing countries

for Australia, Bangladesh, Canada, Chile, Colombia, Germany, Italy, Jamaica, Japan, Malaysia, Mexico,

Philippines, South Africa, Spain and Venezuela (Hsing, 2012). On the other hand, the influence of the


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interest rates was considered to be insignificant for China (Garza-Garcia & Yue, 2010). There are cases

when the relationship proves to be direct, USA for instance, but it only means the time lag between the

FRS measures and its effect (Wood, 2010).

The money supply growth rate is also considered to be a determinant of securities market

development. Ben Bernanke and Kenneth Kuttner (2005) believe that the money supply influences the

securities prices through the monetary transmission mechanism and interest rates (Maskay, 2007). The

shrinkage of the money supply gives rise to the real interest rates which also may increase the Central

bank discount rate and, through the transmission, decrease the value of the securities and other financial

assets. Thus between the money supply growth rate and securities market indicators exists a direct

relationship. This tendency is confirmed in the research performed for India (Singh, 2014), Kazakhstan

(Oskenbayev, 2001), China (Garza-Garcia & Yue, 2010), Pakistan (Sohail, 2009), Malaysia (Vejzagic,

2013), The United Kingdom and Germany (Masuduzzaman, 2012), Thailand (Forson, 2014), Argentina

(Hsing, 2012), Kenya (Barasa, 2014), Saud Arabia (Kalyanaraman, 2014), Namibia (Eita, 2012), Kuwait

(Al – Mutairu, 2007), Lithuania (Pilinkus, 2009), Bulgaria (Hsing, 2011), Canada (Hsing, 2012), Sweden

(Talla). On the other hand, Mukherjee and Nake believe that economic impetus that is created by the

money supply expansion may actually neutralize the negative stock prices effect (Al-Jafari, 2011). This

idea was empirically proved by Patra and Poshakwale when researching the Athens’ stock exchange and

also in Japan (Humpe, 2007). Nevertheless, there is much more empirical evidence that the money supply

is significantly and positively related to securities prices.

Exchange rate, along with three main macroeconomic variables, is one of the most important

determinants of financial market in general. The exchange rate volatility directly affects the international

competitiveness of the particular country (Tripathy, 2011). Currency appreciation leads to the decrease of

the export as the goods of the native companies’ becomes more expensive and harder to sell. This will

influence the profits of these companies and other companies whose business is related to the export-

oriented spheres of the national economy. That will make securities prices plunge. The exchange rate

depreciation should do the vice versa. It is understandable that the effect of the ex-rate volatility is not

that obvious as not all the companies are engaged in export operations. Various economists have different

view on the matter. Granger at all found out mixed results: there is no relationship between the ex-rate

and securities’ prices in Japan and Indonesia, whereas there is a robust inverse relationship between these

in Korea, Hong Kong, Malaysia, Thailand and Taiwan (Tripathy, 2011). The same nature of the

relationship is observed for India (Singh, 2014), Pakistan (Sohail, 2009), Turkey in almost all the sectors

of the economy (Ozlen, 2014), Malaysia (Vejzagic, 2013), Ghana (Adjasi, 2008), USA (Sariannidis,

2010), The United Kingdom and Germany (Masuduzzaman, 2012), Romania (Balint, 2010), Namibia

(Eita, 2012), Philippines (Murcia, 2014), Lithuania (Pilinkus, 2009), Bulgaria (Hsing, 2011), Brasilia

(Silveira dos Santos, 2013), Canada (Hsing, 2012), Sweden (Talla), China (Garza-Garcia & Yue, 2010).

The overwhelming majority of the empirical works suggests a strong inverse relationship, though in rare

cases (Argentina (Hsing, 2012)) it was direct.

Foreign direct investment (FDI) is a powerful toll that could boost the economy, mainly through the

financial market. The direction of the relationship is debated by many scholars. The specialists of the

World Bank believe that FDI inflows expand the securities market as the investors are usually coming

from the developed countries where it is a tradition to be listed on the local exchange, so they increase the

quantity of the listing companies. More economically logical assumption is that the need of increase of

the investment volumes makes the local elites to stimulate the government to change the law in order to

create more favorable investment climate, which, in turn, improves the overall situation on the securities

market (Tchana, World Bank). At any rate, the existence of the relationship is confirmed by empirical

research of India (Singh, 2014), Pakistan (Zafar, 2013), Philippines (Murcia, 2014), Brasilia (Silveira dos


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Santos, 2013), Iran (Faez, 2014). The majority of the works acknowledge the existence of the

bidirectional relationship: securities market and FDI affect each other simultaneously.

The macroeconomic indicators defined may influence the securities market in a different way. We

strongly believe that its effect will be defined by the market mechanism and its efficiency in particular

country. It will also depend on the peculiarities of the local economic system, local securities market

environment and even traditions. There must be employed an individual approach to the analysis of each

market and country. Potential investor or trader should carefully consider his investment decisions based

on macroeconomic environment as, as we saw, it may be ambiguous and represent the securities market

current situation in a very misleading way.

We reckon that macroeconomic environment is complemented by the institutional determinants. We

must not research them separately as together taken they create a synergy effect. Unfortunately, there is

not enough literature and research done on the problems of institutional environment of securities market.

In the works found all institutional determinants are divided into three big groups: regulatory and legal

framework, market infrastructure and other factors (El – Wassal, 2013). The fringe that separates these is

quiet thin so, at times, it is complicated to transfer this or that determinant to one of those groups.

Regulatory and legal framework is the key factor for the securities market functioning. It exists to

provide the proper understanding of the rules of the game between the players and to ensure trade

transparency. It is the framework’s job to organize the process of creation of the information channels

between the market subjects to receive full, time – keeping and true information. Regulators are supposed

to model the mechanisms that assure that the information received is valid and correct for the decision

making (Stijn, 2007). In fact, the main purpose of the regulatory and legal framework of the securities

market is to produce an environment where the subjects of market infrastructure can act transparently,

honestly and at the same time not overloaded with regulations. In its very essence, it must provide valid

market price formation, taking into account all the market subjects, limiting possible speculations but not

binding them with a pile of unnecessary norms and laws because this slows down the market growth and

potential investments. This can be measured with a group of important indicators that would define

whether or not the regulatory and legal framework works well.

First of all, it is the investor’s rights protection and rule of law. In order to create a stable market,

the government must make sure that the potential investors are protected against financial fraud,

unauthorized manipulations with the insider information and speculation that could be performed by

professional market players. Many scholars believe that, ceteris paribus, the market with superior

investor’s rights protection system is more efficient and performs better. La Porta et al prove that the

countries with better investors’ rights protection have securities market that is more independent from the

influence of politics and generally has more chance to attract funds (La Porta et al, 1999). The research on

securities market of 46 developing countries, where in order to estimate the level of investors’ protection

were used Shareholder’s Protection Index and Quality of Law Enforcement from Doing Business, shows

that, on average, 1% increase in the value of the Index will cause Market capitalization to GDP ratio grow

by 10% (Komijani et al, 2012).

Similar research was conducted to analyse countries of Sub-Saharan Africa: the results show that in

many of those improvement of investor’s protection and generally rule of law will positively affect the

securities market (Anayiotos et al, 2009). The same would be fair for MENA region countries (Cherif et

al, 2014). It is also proved by the overarching research performed by Johansson et al, where it is

confirmed the positive influence of improved investors’ protection and rule of law on the development of

financial market across 98 countries of the world, including Ukraine (Johansson et al, 2013). Scholars

conclude that the rule of law is one of the most important determinants of the securities market

capitalization.


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One more indicator is a Regulatory quality. It captures perceptions of the ability of the government

to formulate and implement sound policies and regulations that permit and promote private sector

development (according to The World Bank). This group of institutional factors also includes transparent

corporate governance – the range of structure and rules which ensure that managers act in the best

interests of shareholders (Stijn, 2007). It is closely related to the rule of law and could be considered as

part of it, although very important for the securities market. It is also linked to adoption and

implementation of laws that regulate activities of the companies and banks on securities market, creation

of reliable accounting standards and also relevant regulation and protection of contract enforcement.

Market infrastructure is an important factor of the securities market development: without

appropriate infrastructure, the progress at any market is doubtful. Here we refer to both physical –trading,

depositaries – and electronic – payments systems, clearing, etc – infrastructure. Presence of market

intermediaries encourages investors as it facilitates search of the necessary transparent information.

Additionally, the market requires secondary market subjects – consultants, actuaries, technical specialists,

rating agencies. They accelerate the information flow between the main market players, which gives them

confidence in reliability of the particular market.

All the other institutional factors, which did not fit in the first two, are considered to be classified in

the thirds and last group. This is due to the fact that it is hard to refer those to particular group as they are

very different.

The first among them is political stability. As securities market is mainly considered to be a long –

run investment, it is important for a potential investor that a certain degree of political stability in a

country does not negatively affect financial market and assets. The countries with permanent political

instability, such as Ukraine, usually have quiet depressed securities markets. Political instability threatens

investors and either makes them transfer their assets abroad (as we saw it happened and is still happening

in Russia in 2014 - 2015) or invest in alternative sources of return (banks, precious metals, currency etc).

Political stability plays a major role in securities market development across MENA region countries

(Cherif et al, 2014). Johansson et al prove that political stability drastically affects securities market

capitalization: the more the country is politically stable, the higher its market capitalization (Johansson et

al, 2013). Perotti et al believe that resolving political issues and decreasing political risk improves

securities market performance in developing countries (Perotti et al, 2001).

One more factor that affects securities market is the level of corruption. In general terms,

international organization Transparency International defines it as “the abuse of entrusted power for

private gain”. It always leads to irrational use of scarce resources and, therefore, decelerates the economic

growth and aggravates securities market performance. There are numerous studies that provide evidence

of negative relationship between corruption and securities market. Results of the research in Sub-Saharan

Africa show that corruption is the biggest decelerator of the securities market development in the region

(Anayiotos et al, 2009). In MENA countries the effect of corruption is so destructive that it counters the

positive tendencies in the development of bank sector (Cherif et al, 2014). The study of 42 developing

countries also proves that securities market performance is under severe negative influence of corruption

(Ayaydin, 2013). It is obvious that decrease of corruption positively affects securities market as it allows

the investor to save on investment – related affairs and act transparently: it has the same influence as

political stability.

There is a huge number of institutional factors that might influence securities market. We believe

that the best estimates of these are provided by the World Bank. The Worldwide Governance Indicators,

except mentioned above, includes also Government Effectiveness and Voice and Accountability

(Kaufmann, 2010).


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Government effectiveness resembles “perceptions of the quality of public services, the quality of

the civil service and the degree of its independence from political pressures, the quality of policy

formulation and implementation, and the credibility of the government's commitment to such policies”.

Stable economy is the foundation for the development of any market and securities market is not an

exception. Sound, predictable, transparent and coherent monetary, fiscal and external economic policies

might spur positive investment decisions that will improve the performance of securities market.

Voice and Accountability is also considered to be important institutional factor as, according to

World bank, it is “capturing perceptions of the extent to which a country's citizens are able to participate

in selecting their government, as well as freedom of expression, freedom of association, and a free

media”. It is believed that, ceteris paribus, countries with relatively higher degree of economic, political

and social freedom develop faster and more efficient than those with relatively lower one. This can be

explained by the fact that higher degree of economic freedom fills the market with confidence as it means

that investors will not be suppressed with abnormal regulations. We believe that institutional environment

must appropriate investor’s confidence. Safe harbor for the money is the highest value for investors’

decision making.

There are, of course, other factors that might theoretically influence securities market. Nevertheless,

in our research we concentrated our attention on the analysis of the main ones.

Data and methodology

In order to understand the relationship between macroeconomic and institutional indicators on one

side and microstructural – on the other, we will create linear multifactor correlation models. In these

models macroeconomic and institutional factors will be considered to be exogenous, independent

variables whereas microstructural – endogenous variables of the country’s securities market.

The main hypothesis of our survey are as follows:

in developed countries (such as the USA, the UK, Japan and Germany) macroeconomic variables

are more important determinants of securities market than institutional factors as these countries

possess institutes and institutions that have already completely formed and successfully regulate the

economic environment;

in developing countries (such as Brazil, India, China, South Africa and Ukraine) institutional factors

are much more important determinants of securities market than macroeconomic variables due to

the fact that these countries have their market economy only emerging, institutes and institutions

did not reach their fruition. Thus, any drastic changes of the institutional environment have a robust

effect and impinge on unstable economic system, which in the end reflects on securities market.

Using a variety of macroeconomic variables and institutional factors listed above we will perform

an econometric survey of these securities markets. All the variables are considered to be independent. Our

dependent variables include: Stock market capitalization to GDP (%) and Quantity of officially listed

companies as determinants of the size of a particular securities market; Stock market total value traded to

GDP (%) as well as Stock market turnover ratio (%) as determinants of the liquidity of a particular

securities market.

The Data for analysis is represented by the World bank statistics and comprises a period from 2004

to 2013 for the UK, the USA, Japan, Germany, Brazil, India, China, South Africa and Ukraine. We

presume that the model does not have autocorrelation and heteroscedasticity and the relationship between

dependent and independent variables is linear. The models were created in a way that minimizes the

multicollinearity of the independent variables. Taken into account the fact that all the regression equations


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are only an estimate of the real regression coefficients and other regression elements, we exclude the

errors from the analysis, considering them to be absent.

The regression equation will be as follows:

Log Ỹi = a0 + CoC a1+ RQ a2+ PS a3+ GE a4+RoL a5+VaA a6+ GDP a7+ CPI a8+ UR a9+ ExR a10+

+ RIR a11+ MS a12+ FDI a13+ GrS a14,

(1)

where:

Log Ỹi – logarithm of the theoretical value of the dependent variable i;

a0 – zero regression coefficient;

Zai – actual values of independent variable Z with pertinent regression coefficient ai.

Method of logarithms is used in order to be able to present the results of our research. In our case,

any change of a particular independent variable Zai by one point, in case all the other remain stable,

results in change of dependent variable Log Ỹi by ai multiplied by 100%.

Results

Results of multi correlation models with pertinent correlation and determination coefficients, as

well as corresponding p-values for every variable are represented in tables 1-8.


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Table 1. Stock market capitalization to GDP (%) and macroeconomic and institutional factors

(developed countries)

Country

Variable

US

A

JA

PA

N

GE

RM

AN

Y

UK

Zero regression coefficient (а0) 15,82* 9,66** -2,9* 3,19***

Control of Corruption (CoC) -0,63* 2,25***

Requlatory Quality (RQ) -2,24* 2,44*

Political stability (PS) -1,35*** 0,21*** 0,11

Government Effectiveness (GE) 2,74***

Rule of Law (RoL)

Voice and Accountibility (VaA) -0,40 -5,55***

GDP (GDP) -0,03 х10-11

* -0,01 х10-11

***

Inflation Rate (CPI) -0,08* -0,15** -0,07***

Unemployment Rate (UR) -0,05* -0,26**

Exchange Rate (per 1 USD) (ExR) 1,69*

Real Interest Rate (RIR)

Growth of Money supply М2 (MS)

Foreign Direct Investment (FDI) -0,09 х10

-11 * -1,27 х10

-11 **

-0,3 х10-11

*

-0,03х10-11

**

Gross savings as a % of GDP (GrS) 0,08* 0,02 -0,02*** -0,02

Correlation coefficient (r) 0,99 0,99 0,99 0,99

Determination coefficient (R2) 0,98 0,93 0,95 0,93

F significance of the model (F sign) 0,01* 0,05** 0,01* 0,05**

Note: value *denotes significance at 1% level, ** at 5% level, *** at 10% level respectively.

High values of determination and correlation coefficients denote that chosen independent factors

explain a great part of resulting variable variance, which we believe to be the sign of high adequacy of the

models. F statistics has very low values, which means that all the coefficients of the models are not

occasional mathematical deviation.

It is obvious from the Tables that models for developing countries are much more accurate than for

developed ones. If we go into more detail, we can notice that correlation coefficients in models for

developing countries are also more accurate than those for developed countries.

In Table 1 we see the results of correlation between macroeconomic and institutional variables and

stock market capitalization to GDP (%). From the table we can see that in case of stock market

capitalization to GDP we cannot confirm our hypothesis about the developed countries: we see that, even

though macroeconomic factors, such as FDI, inflation rate and savings rate, are important determinants of

capitalization, institutional factors, such as control of corruption, regulatory quality and political stability,


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are also a vital part of capitalization dynamics. In fact, we can even see that, judging from values,

institutional factors are more crucial for capitalization of securities market in developed countries.

Table 2. Stock market capitalization to GDP (%) and macroeconomic and institutional factors

(developing countries)

Country

Variable

IND

IA

CH

INA

SA

R

UK

RA

INE

Zero regression coefficient (а0) -8,25* -4,94** 14,25* -13,86*

Control of Corruption (CoC) 4,12*

Requlatory Quality (RQ) 5,75*

Political stability (PS) 0,27

Government Effectiveness (GE) 2,34* 3,29* -0,36

Rule of Law (RoL) 2,41* 1,72***

Voice and Accountibility (VaA) 2,36*

GDP (GDP) 0,08 х10

-11 *

-0,02 х10-11

* 0,1 х10-11

***

Inflation Rate (CPI) -0,11* -0,06*

Unemployment Rate (UR) -0,26** -0,13*

Exchange Rate (per 1 USD) (ExR) 0,04** 0,25*

Real Interest Rate (RIR) -0,13*

Growth of Money supply М2 (MS) -0,04**

Foreign Direct Investment (FDI) 1 х10-11

*

Gross savings as a % of GDP (GrS) -0,06*** -0,08*



F significance of the model (F sign) 0,006* 0,007* 0,005* 0,003*


On the other hand, we do confirm our hypothesis for developing countries in the Table 2: in the

table we see that government effectiveness, rule of law and voice and accountability are decisive

determinants of capitalization. Values of these coefficients as well as some other institutional factors are

much higher than values of macroeconomic determinants. Among macroeconomic factors the most

important for developing countries securities market in terms of capitalization are inflation and

unemployment rate, exchange rate, GDP. Nevertheless, the institutional environment affects securities

market capitalization tens of times stronger than macroeconomic factors. We reckon that this is a proof of

our hypothesis.


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Table 3. Quantity of officially listed companies and macroeconomic and institutional factors

(developed countries) Country

Variable

US

A

JA

PA

N

GE

RM

AN

Y

UK

Zero regression coefficient (а0) 1,55* 1,12 0,51 0,28

Control of Corruption (CoC) 0,41*** -0,14

Requlatory Quality (RQ) 0,13* 0,46 0,90*

Political stability (PS)

Government Effectiveness (GE) 0,02

Rule of Law (RoL) 0,65*

Voice and Accountibility (VaA)

GDP (GDP) -0,002 х10-11

*

Inflation Rate (CPI) -0,03* -0,11* 0,23**

Unemployment Rate (UR) -0,05* -0,20* 0,01*** 0,03***

Exchange Rate (per 1 USD) (ExR) 1,07** 3,11**

Real Interest Rate (RIR) -0,04* 0,07** 0,1**

Growth of Money supply М2 (MS) -0,04** 0,01**

Foreign Direct Investment (FDI) 0,02 х10

-11 * -0,44 х10

-11 -0,06 х10

-11

-0,03х10-11

**

Gross savings as a % of GDP (GrS) -0,01* 0,03**



F significance of the model (F sign) 0,01* 0,05** 0,03** 0,04**



quantity of officially listed companies. We can conclude from the results depicted in this Table 2 that we

cannot confirm our hypothesis for developed countries for quantity of listed companies as well. Both

macroeconomic variables, such as unemployment rate, real interest rate and FDI that seem to be crucial

for all the analysed developed countries, and institutional factors, such as control of corruption and

regulatory quality, are deemed to play equal role in defining dynamics of the quantity of listed companies

in developed countries.


March 2016, Vol. 11 (1)


Table 4. Quantity of officially listed companies and macroeconomic and institutional factors

(developing countries) Country

Variable

BR

AZ

IL

IND

IA

CH

INA

SA

R

UK

RA

INE

Zero regression coefficient (а0) 2,53* 5,43* 2,55* -2,31* 0,74***

Control of Corruption (CoC) 0,31* 0,67*

Requlatory Quality (RQ) 0,21*** 0,42* 0,20

Political stability (PS) 0,66*

Government Effectiveness (GE) 0,50*

Rule of Law (RoL)

Voice and Accountibility (VaA) 0,53**

GDP (GDP) -0,02 х10

-

11 *

-0,02 х10-

11 *

0,006 х10-11

*

-0,2 х10-11

*

Inflation Rate (CPI) -0,02* 0,01* -0,002**

Unemployment Rate (UR) -0,21* -0,09* -0,10*

Exchange Rate (per 1 USD) (ExR) -0,07*

Real Interest Rate (RIR) -0,01* 0,005 -0,01** -0,03*

Growth of Money supply М2 (MS) -0,003 0,001***


-11

*

0,02 х10-11

*

Gross savings as a % of GDP (GrS) -0,01* -0,01*

Correlation coefficient (r) 0,99 0,99 0,99 0,99 0,99

Determination coefficient (R2) 0,98 0,97 0,99 0,99 0,98

F significance of the model (F sign) 0,002* 0,003* 0,0005* 0,001* 0,001*


On the contrary, in developing countries (Table 4) we also do not see a big difference between the

influence of macroeconomic and institutional variables on the quantity of listed companies. Even though

values of institutional factors are higher and their significance is more robust, we believe that it is not

enough to justify our hypothesis. Thus, in this case we reject our hypothesis, believing it to be not

relevant when it comes to quantity of listed companies. It might be also the case that this particular

indicator of securities market performance has limited descriptive power and is not describing the real

market situation. This should be considered in the following surveys on securities market institutional

environment.


March 2016, Vol. 11 (1)


Table 5. Stock market turnover ratio (%) and macroeconomic and institutional factors (developed countries)

Country

Variable

US

A

JA

PA

N

GE

RM

AN

Y

UK

Zero regression coefficient (а0) 9,39* 11,01* 2,84** 15,92*

Control of Corruption (CoC)

Requlatory Quality (RQ) 0,23

Political stability (PS) -0,51*

Government Effectiveness (GE) 0,35

Rule of Law (RoL) 1,15**

Voice and Accountibility (VaA) -1,10 -3,30* -2,91*

GDP (GDP) 0,04 х10-11

-0,007х10-11

Inflation Rate (CPI) -0,02 0,01

Unemployment Rate (UR)

Exchange Rate (per 1 USD) (ExR) -3,56* 0,02 1,99*** -2,82**

Real Interest Rate (RIR) -0,03 0,05**

Growth of Money supply М2 (MS) 0,06*** 0,03* 0,02*

Foreign Direct Investment (FDI) -0,1 х10-11

*** -15х10-11

**

Gross savings as a % of GDP (GrS) -0,07*** -0,06**



F significance of the model (F sign) 0,07*** 0,06*** 0,06*** 0,02**



stock market turnover ratio (%). From the table we can see that in case of turnover ratio we cannot

confirm our hypothesis about the developed countries. In fact, rule of law and voice and accountability

seem to be crucial determinants of securities market institutional environment. Thus, we can argue that

institutional environment in developed countries might be sometimes even more decisive for securities

market. However, exchange rate is also an important indicator for turnover ratio in developed countries

securities market. That is why we cannot confirm our hypothesis: institutional environment and

macroeconomic variables seem to be almost equally important for securities market with a small

prevalence of institutional factors.


March 2016, Vol. 11 (1)


Table 6. Stock market turnover ratio (%) and macroeconomic and institutional factors (developing countries)

Country

Variable

BR

AZ

IL

IND

IA

CH

INA

SA

R

UK

RA

INE

Zero regression coefficient (а0) 0,62 3,46 2,94*** 0,39** -32,59**

Control of Corruption (CoC) 0,14* 8,02**

Requlatory Quality (RQ) 1,37*** -1,39**

Political stability (PS) 0,16 -0,67* 1,15**

Government Effectiveness (GE)

Rule of Law (RoL) 1,08* 0,33*

Voice and Accountibility (VaA) 1,40***

GDP (GDP) -0,04 х10

-11

*

-0,09 х10-

11 *

0,006 х10-11

*

0,03 х10-11

*

3,7 х10-11

***

Inflation Rate (CPI) 0,01 0,04* -0,05**

Unemployment Rate (UR) -0,13*** -0,44* -0,61* 1,85

Exchange Rate (per 1 USD) (ExR) -0,30**

Real Interest Rate (RIR) -0,01*** -0,06*

Growth of Money supply М2 (MS) -0,01

-

0,0007*** 0,01***

Foreign Direct Investment (FDI)

Gross savings as a % of GDP

(GrS) -0,06** -0,08*



F significance of the model (F

sign) 0,05** 0,003* 0,04** 0,0001* 0,05**


On the contrary, we might confirm our hypothesis concerning analysed developing countries in

Table 6. As we see in the results, almost all securities markets of developing countries, except for South

African, are greatly influenced by control of corruption, regulatory quality and political stability. In fact,

institutional factors influence stock market turnover ratio tens of times stronger than macroeconomic

factors. Even though macroeconomic determinants do also play a role in developing dynamics of stock

market turnover ratio, it is not that robust. GDP, inflation rate, unemployment rate and money supply

growth are supposed to be the best macroeconomic determinants of stock market turnover ratio in

developing countries.


March 2016, Vol. 11 (1)


Table 7. Stock market total value traded to GDP (%) and macroeconomic and institutional factors (developed countries)

Country

Variable

US

A

JA

PA

N

GE

RM

AN

Y

UK

Zero regression coefficient (а0) -2,42 9,05** -13,86* 21,13*

Control of Corruption (CoC) 0,63** 3,25*

Requlatory Quality (RQ) 0,85** -0,40*

Political stability (PS) -0,50*

Government Effectiveness (GE) -2,04*

Rule of Law (RoL)

Voice and Accountibility (VaA) -4,18*

GDP (GDP) 0,09 х10-11

** -0,09 х10-11

* -0,05х10-11

*

Inflation Rate (CPI) -0,10** -0,06 -0,23* 0,01

Unemployment Rate (UR) 0,22*

Exchange Rate (per 1 USD) (ExR) 0,05** -10,84*

Real Interest Rate (RIR) -0,14*

Growth of Money supply М2 (MS) 0,02*** 0,08*** 0,02*

Foreign Direct Investment (FDI) 0,2 х10-11

* -0,06х10-11

**

Gross savings as a % of GDP (GrS) -0,08* -0,09*** -0,23*



F significance of the model (F sign) 0,03** 0,03** 0,001* 0,01*



stock market total value traded to GDP (%). Results indicate that total value traded to GDP is almost

equally influenced in both developed and developing countries. Thus, we reject our hypothesis. GDP,

inflation rate, money supply growth and savings rate seem to be crucial macroeconomic determinants of

developed countries stock market liquidity. Nevertheless, in case of Japan, Germany and the UK we

might conclude that voice and accountability, control of corruption and government effectiveness

respectively play a much stronger role for the liquidity of their stock markets.


March 2016, Vol. 11 (1)


Table 8. Stock market total value traded to GDP (%) and macroeconomic and institutional factors (developing countries)

Country

Variable

BR

AZ

IL

IND

IA

CH

INA

SA

R

UK

RA

INE

Zero regression coefficient (а0) -4,32** 3,74* -19,07* 4,06** 7,34*

Control of Corruption (CoC) 0,28 0,51***

Requlatory Quality (RQ) -0,28

Political stability (PS)

Government Effectiveness (GE) 3,89* 1,70*

Rule of Law (RoL) 2,66* 3,86*

Voice and Accountibility (VaA) 2,13* 0,91***

GDP (GDP) -0,02 х10

-11

-0,08 х10-11

*

0,02 х10-11

*

0,1 х10-11

**

1,1 х10-11

*

Inflation Rate (CPI) 0,03**

Unemployment Rate (UR) -0,57* -0,18*

Exchange Rate (per 1 USD) (ExR) 0,66*

Real Interest Rate (RIR) -0,01*** -0,04 0,06*

Growth of Money supply М2 (MS) -0,02* -0,01** 0,01*


-11

*** 0,6 х10-11

*

0,9 х10-11

***

-6,1 х10-

11 *

Gross savings as a % of GDP (GrS) -0,04*** -0,06*



F significance of the model (F sign) 0,01* 0,01* 0,0006* 0,001* 0,003*


On the other hand, we might confirm our hypothesis about developing countries from Table 8.

Government effectiveness, rule of law and voice and accountability seem to have a robust impact on

developing countries stock market liquidity. As with the other liquidity criteria, institutional factors

influence stock market turnover ratio tens of times stronger than macroeconomic factors. However,

macroeconomic variables also play a role in definition of securities market liquidity. For instance, GDP as

well as FDI seem to be determinative for almost all developing countries analysed. Real interest rate and

money supply growth have also an impact but it does not seem to hold in all the developing countries. All

coefficients are statistically significant which means that all the relationships do have a real sense and are

not simply mathematical deviations.

Over the course of our survey we found that in some cases our hypothesis is true whereas in the

other – partially true or absolutely false. In our opinion, the relationships found should be analysed in the

following research in order to understand the economic underpinning of those. We, however, did not set a

goal to do that.


March 2016, Vol. 11 (1)


Conclusions

In this paper we analysed the relationship between institutional and macroeconomic variables on

one side and microstructural indicators of securities market – on the other. In the course of our survey a

set of developed and developing countries were analysed. We were able to confirm our hypothesis for

some of them and rejected – for the others. The crucial conclusions derived from our survey might be

presented in the table 9.

Table 9. Hypothesis confirmation in developed and developing countries

Microstructural

indicator of securities

market

Developed countries: the USA,

Japan, Germany, the UK

Developing countries: Brazil,

India, China, South Africa and

Ukraine

Importance of

institutional

variables

Importance of

macroeconomic

variables

Importance of

institutional

variables

Importance of

macroeconomic

variables

Stock market

capitalization to GDP

(%)

More important

than

macroeconomic

Less important

than institutional

More important

than

macroeconomic

Less important

than

institutional

Quantity of officially

listed companies

Relatively equal

role

Relatively equal

role

Relatively equal

role

Relatively equal

role

Stock market turnover

ratio (%)

Relatively equal

role with a bit

stronger impact

Relatively equal

role with a bit

weaker impact

More important

than

macroeconomic

Less important

than

institutional

Stock market total value

traded to GDP (%)

More important

than

macroeconomic

Less important

than institutional

More important

than

macroeconomic

Less important

than

institutional

The results clearly reveal that our hypothesis about developing countries is very much accurate:

almost in all the cases the influence of the institutional environment is more robust than macroeconomic

determinants. In our opinion it is an important policy implication for the developing countries. It means

that a way to improve the securities market conditions in developing countries might be reforms that aim

on improving the institutional environment in the first place.

On the contrary, our hypothesis for the developed countries is false: institutional environment is

either playing equal role with macroeconomic environment or is more important. Thus, we believe that

developed countries should also take measures to ensure that their institutional environment is well –

managed.

In the light of the above mentioned, it is important to stress that the effect of institutional

environment on securities market in researched countries is greatly underestimated. Even though

additional study on the other countries is required to confirm the thesis, in our opinion, institutional

environment plays a major role in securities market development and dynamics. We believe it to be a

crucial determinant that must be taken into account at all times when researching securities market.

Following surveys might include the causes of such a relationship: though we all intuitively understand

how institutions improve securities market, it is important to thoroughly explain the mechanism that is

underpinning these economic processes and its nature.


March 2016, Vol. 11 (1)


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d=

Author: Hnatyuk Rostyslav, Ukraine, PhD student at Ivan Franko national university of L’viv,

faculty of economics, department of economic theory. E-mail: [email protected].

http://databank.worldbank.org/data/reports.aspx?source=2&country=&series=NY.GNS.ICTR.ZS&period

http://databank.worldbank.org/data/reports.aspx?source=2&country=&series=NY.GNS.ICTR.ZS&period

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British Journal of Economics, Finance and Management ...2)/EFVol.11 (2) Article 2.pdf · March 2016, Vol. 11 (1) ... booming and technologically intensive market in the world economy