Emerging Economies and Causal Relationship of Economic Growth with Financial Market Development

Abstract

The study aims to test relationship existing between equity market expansion and economic prosperity along with how this relationship is influenced and controlled by COVID-19. The COVID-19 as control variable is the uniqueness of this study. A total of twenty-three countries which are a part of emerging countries according to MSCI Index are selected out of total twenty-five countries. The research is helpful to understand contrasting hypotheses generated as supply leading hypothesis, demand leading hypothesis, Bi-directional hypothesis and no relation hypothesis with the special context of COVID-19. The connection of the two variables: economic growth and stock market development has studied in many researches but with the controlling variable of COVID-19 along with the findings are unique features of this study and contributing valuable addition to existing literature. The data is collected from World Bank Database from 2001 to 2020 (n=460). We applied correlation analysis to address the multicollinearity issue. The stationary properties along with endogeneity issue have been tested through unit root ADF – fisher chi-square test and Penal GMM techniques applied. The results suggest that negative relationship exist among economic prosperity and COVID-19 but no relationship established between equity market development and economic growth.