Banking sector development and economic growth in ARF countries: the role of stock markets

Abstract

The paper examines the long-run relationship between banking sector development, stock market development and economic growth in 26 ASEAN regional forum (ARF) countries for the period 1961–2012. Using principal component analysis for the construction of development indices and panel vector auto-regressive model for testing the Granger causalities, the study shows that a long-run relationship between banking sector development, stock market development and economic growth exists in ARF countries. The study also uniquely finds the existence of bidirectional causality between banking sector development and economic growth and a unidirectional causality from stock market development to economic growth. It, however, reveals the existence of unidirectional or bidirectional causal links between banking sector development and stock market development. Hence, future studies on economic growth that exclude the dynamic interrelationship of these variables will be unreliable.

Keywords:

• banking sector
• stock markets
• economic growth
• PCA
• panel VAR
• Granger causality
• ARF countries

JEL classification:

• O43
• O16
• E44

Notes

1. Financial development is defined in terms of the aggregate size of the financial sector, its sectoral composition, and a range of attributes of individual sectors that determine their effectiveness in meeting users’ requirements. The evaluation of financial structure should cover the roles of the key institutional players, including the central bank, commercial and merchant banks, saving institutions, development financial institutions, insurance companies, mortgage entities, pension funds, and financial market institutions (see, for instance, Zaman et al. 2012).

Additional information

Notes on contributors

Rudra P. Pradhan

Rudra P. Pradhan is a SAP Fellow and an Assistant Professor at Vinod Gupta School of Management, Indian institute of Technology Kharagpur, India. Dr. Pradhan is a reviewer and board member of various journals like African Journal of Political Science and International Relations (Associate Editor), Empirica, Neural Computing and Applications, Emerald Emerging Market Case Studies, Review of Economics and Finance, Economic Modelling, Energy Systems, International Journal of Financial Research, International Journal of Public Policy, etc. For his credit, he has number of publications in many international journals. He is editor of numerous books in the area of Infrastructure Finance and Financial Markets.

Sasikanta Tripathy

Sasikanta Tripathy is a finance graduate from Utkal University, Bhubaneswar. He completed his MBA and M. Phil. in the same University and pursuing Ph. D. (Thesis to be submitted shortly) in Finance at Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur, India. At present, he is a faculty at National Institute of Technology, Jamshedpur. For his credit, he has number of publications in many international journals.

Shashikant Pandey

Shashi Kant Pandey is a Physics Hons. Graduate from St. Columba’s College Hazaribag, India (1991). Later he did Master in Geography from Delhi School of Economics (1996) and Master in Urban and Regional Planning from Centre for Environmental Planning and Technology University, Ahmedanad (1998), India. He was trainee in Space Application Centre Ahmedabad, India in Remote Sensing Application Group during March 1997 to December 1997. During 1998 to 2007 he served as Project Manager in CEPT University Ahmedabad, GIS Divisional Head in Scanpoint Graphics Limited Ahmedabad and Principal Consultant in GEC Ranchi, India. Currently he is working in Birla Institute of Technology Mesra, Ranchi, India, as an Assistant Professor in the Department of Architecture and Urban Planning and pursuing Ph. D. (Thesis submitted) in Infrastructure Finance at Vinod Gupta School of Management, Indian Institute of Technology Kharagpur, India. Mr. Pandey is an Associate Member of Institute of Town Planner India (AITP) and Life Member of Indian Society of Geomatics, Indian Society of Remote Sensing and Indian Cartographic Association. For his credit, he has number of publications in many international journals.

Samadhan K. Bele

Samadhan Bele is an architecture graduate of Sir J. J. College of Architecture Mumbai, India (2009). He received a Master in Technology in Infrastructure Design and Management from Indian Institute of Technology Kharagpur, India. He is currently pursuing Ph. D. (Thesis submitted) in Infrastructure Finance at Ranbir and Chitra Gupta School of Infrastructure Design and Management, Indian Institute of Technology, Kharagpur, India. For his credit, he has number of publications in many international journals.