Do Stock Index Futures Affect Economic Growth? Evidence from 32 Countries

ABSTRACT

This article investigates the relationship between stock index futures markets development and economic growth using time-series methods for 32 developed and developing countries. Evidence of cointegration between stock index futures and real economy in 29 countries suggests the presence of co-movements among the variables, indicating long-run stationarity in those countries. Our findings show that there is Granger-causality from stock index futures markets development to economic growth for middle-income countries with relatively low real per capita GDP, and Granger-causality in the reverse direction for the countries with high real per capita GDP. Variance decomposition and impulse-response function (IRF) analyses results support the existence of a relationship between stock index futures and real economy.

KEY WORDS:

• economic growth
• financial development
• stock index futures

JEL CLASSIFICATION:

• G10
• O16
• O40

Notes

^1. See Levine (2005) for a survey. See Wachtel (2001) for a summary of consensus and discussion of the techniques that have been used in the related literature.

^2. See also Cyree, Huang, and Lindley (2011) for a discussion of function of banks’ derivatives use.

^3. See Jeong, Kymn, and Kymn (2003), Berger, Hasan, and Klapper (2004), Şendeniz-Yüncü, Akdeniz, and Aydoğan (2008), and Cheng and Degryse (2010) for further analysis of the impact of banking sector on economic growth.

^4. See also Saci, Giorgioni, and Holden (2009) for a discussion of the impact of both stock market and banking sector developments on growth using GMM panel techniques.

^5. See also Baluch and Ariff (2007) and Bekale, Botha, and Vermeulen (2015) for discussions of derivative markets and economic growth relationships.

^6. Smith and Stulz (1985) argue that by reducing the variability of the future value of the firm, hedging lowers the probability of incurring bankruptcy costs, and benefits shareholder.

^7. EViews 7 is used for all the analyses.

^8. KPSS test results are available upon request.

^9. Source for GDP growth (annual %) and gross fixed capital formation (annual % growth) data for Hungary is the World Bank.

^10. See also Wachtel (2003) for the discussions of different levels of effects of finance on economic growth in countries with different income levels.

^11. IRF analyses results are available upon request.