DYNAMIC INTERACTIONS BETWEEN STOCK MARKETS AND THE REAL

ECONOMY: EVIDENCE FROM EMERGING MARKETS

Abstract
This paper re-examines the relationship between a country’s aggregate stock market and general economic
development for fourteen emerging economies for the period from 1995 to 2014. When examining the linkage
between the stock market and economic development, proxied by GDP growth or with gross fixed capital
formation growth, we did not find a meaningful relationship between them. However, when we included
additional control variables strong, dynamic interactions between the two magnitudes surfaced. Specifically, it
was found that the stock market is positively and robustly correlated with contemporaneous and future real
economic development and, thus, it directly contributed to a country’s economic development either through
the production of goods and services or the accumulation of real capital. Thus, it can be inferred that the stock
market alone is not capable of boosting economic development in these countries unless being part of a
comprehensive financial system (which includes banks) as well as investment in real capital. The policy
implications are clear. Government authorities must recognize that the stock market alone is not a driver of
economic development and that a sound, efficient financial system (which includes banks) must be present in
order to contribute and foster economic development.

Nikiforos T. Laopodis
ALBA Graduate Business School and
Deree College at
The American College of Greece
Xenias 6-8, 115 27 Athens, Greece
Tel: +30 (210) 8964531 ext. 3306
E-mails: nlaopodi@alba.edu.gr; nlaopodis@acg.edu

Andreas Papastamou
Pantion University, Athens, School of International and European Studies, and
Economic Counselor, Ministry of Foreign Affairs, Greece
Akadimias 1, Athens-10671
Tel. 210-9444.959
E-mail: apapastamos@gmail.com

Published in International Journal of Emerging Markets

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I. INTRODUCTION
It is widely believed that since the 1990s booming equity markets in developed
economies have created substantial wealth for households and institutions alike. For
example, Ludvigson & Steindel (1999) estimated that US households’ equity holdings wealth
has increased by nearly 100% during the period from 1994 to 1997. Obviously, these
extraordinary gains had a significant impact on consumer spending and investment in the US
economy. Malkiel (1998) argues that a stock market significantly moves the real economy
because it generates wealth. Fama (1990, 1991) and Geske and Roll (1983) additionally found
that stock markets in advanced economies rationally signal changes in real activity. Atje and
Jovanovic (1993) and Levine and Zervos (1998) have also attested to the explanatory power
of various stock-market indicators to economic growth rates across countries. Rousseau and
Wachtel (2000) studied the link between equity market and growth for 47 countries (for the
1980-1995 period) within a dynamic panel setting and reported that (the liquidity of) stock
markets matter a lot for economic growth. Finally, important empirical research exists for
major international stock markets (e.g., Cheung and Ng, 1998 and Chung et al., 1998) also
documenting a close relationship between stock returns and real economic activity.
In recent years, however, there has been an increasing worry that stock market
movements among developed economies could not be explained by economic fundamentals
and thus were unrelated to the real economy (as measured, for example, by GDP growth).
Early studies by Carlson and Sargent (1997) and Shiller (2005) argued that most of the rise in
equity prices during the second part of the 1990s in the US was not due to fundamental
values but to exogenous shocks and/or market irrational behavior. The subsequent findings
by Lee (1995, 1998) and Chung and Lee (1998) corroborated the above evidence and found
that traditional fundamental variables like discount rates, earnings, dividends and industrial
production - all related to the real economy - did not adequately explain price movements. In
addition, some researchers have voiced concerns that the development of stock markets can
be detrimental to economic growth because they may relax counterproductive corporate
takeovers (Shleifer and Summers, 1988; Morck et al., 1990). For example, stock markets
encourage short-term profit and do not allow corporate managers to focus on long-term
investments, which are key to a country’s economic development. Moreover, foreign capital
flows may not be long-term but speculative and unrelated to economic fundamentals (Singh
and Weiss, 1998) thus creating financial crises (short-run liquidity squeezes).
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 More recent evidence on the disconnection between stock markets and economic
activity in the US in the second part of the 1990s was presented in a series of papers by
Binswanger (2001, 2004), who interpreted the evidence as giving support to the stock-market
bubble hypothesis. Further evidence by Laopodis (2006, 2011), noted the absence of a
consistent, dynamic relationship between real activity and stock prices for the United States
since the 1990s. Following Laopodis (2011), this essentially means that such a breakdown in
the stock market – real economy linkage would create dislocations in the economy and hurt
many sectors. Naceur and Ghazouani (2007), examined 11 MENA countries for the period
from 1979 to 2003 using dynamic panel analysis, found an insignificant relationship between
stock market and banking development on economic development. Finally, in view of the
observation of ‘excessive’ volatility in equity markets in recent years, many authors have
suggested that it may hamper the process of economic growth, at least in emerging
economies. That is, high stock price volatility may weaken the ability of the stock market to
efficiently allocate financial (or even real) resources to their best uses so as to contribute to
real economic growth (see, for instance, DeLong et al., 1989).
Given the above (conflicting) evidence, this paper sets out to re-examine the nature
of the relationship between a country’s aggregate stock market and general economic
development for fourteen emerging economies for the period from 1995 to 2014. Previous
studies have emphasized the short-run relationship among stock returns (financial variables)
and (real) economic activity. In addition, little work has been done on the long run
comovement between stock returns and real economic development for emerging
economies. Finally, another aim of this study is to examine if this breakdown also exists
among emerging economies. Thus, this paper aims at filling this void in the literature.
Specifically, the paper has three goals. First, to investigate the inter-temporal
relationship between GDP (the growth rate GDP will be the main proxy for real economic
activity) and stock returns (each country’s national stock market index is the main magnitude
for stock returns), that is, their short- and long-run behavior, and draw inferences about the
possible common economic forces driving these magnitudes. This will be accomplished by
searching for evidence of cointegration between these series for each country and see if they
share a common stochastic (long-run) trend despite having short-run fluctuations
(deviations). The empirical strategy for the investigation of the issue makes use of the
Johansen’s (1991) cointegration and Pedroni’s (1999, 2000) panel cointegration approaches,
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in an effort to explain the short- and long-run fluctuations in the two magnitudes, both at
the country and panel levels.
What is the economic rationale for presence of cointegration between equity prices
and economic activity? Simply put, a rise in economic activity generates positive forecasts for
higher earnings and profits of firms which, in turn, might consider raising dividend payouts
to shareholders. Thus, the stock market rises and, in turn, indirectly contributes to the
further development of real investments and thus to economic growth. By contrast, absence
of cointegration between the two magnitudes, would imply a disconnection between the two
and the real economy may not benefit from stock market movements.
Second, we extend the analysis to include alternative proxies for economic
development such as industrial production and government gross fixed capital formation as
well as with combinations of variables such as interest rates. The first variable is also related
to (or is part of) real economic activity and is used in lieu of GDP growth, while the second
one refers to real investment, which directly contributes to economic development (and
growth). In other words, fixed capital formation facilitates the production of goods and
services, the makeup of GDP, and thus directly affects real economic growth. Differences in
the investment rates between countries often reflect different levels of economic
development which, in turn, may affect the country’s financial sector (the stock market here).
The empirical strategy to address the above issues will be done via vector autoregression
(VAR) and several panel specifications.
Third, the above analyses should offer insights about the relationship between stock
markets and the real economy so as to answer questions such as: are stock markets and the
real economy closely related or are the former simply areas for speculation separated from
real economic activity? Have stock markets contributed to economic growth during the last
few decades and would stock-market declines endanger the much-desired long-run growth
of emerging economies? Finally, what are the implications for economic policy of absence or
presence of a linkage between the stock market and real economic activity?
The rest of the paper is organized as follows: Section II outlines the relationship
between and significance of the linkages between a country’s stock market and the real
economy. Section III lays out the methodological design of the study, explains the data and
variables, and presents some preliminary statistical results. Section IV presents and discusses

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the major findings and, lastly, Section V summarizes the study and concludes with some
recommendations for future research.

II. THE ROLE OF STOCK MARKETS IN THE REAL ECONOMY

In this section, we briefly elaborate on the importance of a well-functioning stock
market on the economic development and growth of an emerging economy by providing a
short and selective literature review.
Malkiel (1998) argued that a stock market significantly moves the real economy in, at
least, three ways: first, higher stock values create wealth. Second, stock prices of companies
decrease the cost of raising new capital thus directly contributing to higher capital
investments and third, a booming stock market increases consumer and business confidence.
Therefore, in an economy where stocks represent the largest component of the household
sector’s assets, the impact on the real economy could be quite significant. In other words,
rising confidence fosters business and consumer spending and the lower cost of raising
capital provides further incentives to firms to increase investment spending all of which, in
turn, contribute to higher economic growth.
Levine (1997) also claimed that stock markets play an important role for the real
economy because they provide liquidity, among other interrelated financial services. Liquid
stock markets render real (capital) investments less risky and attractive to investors because
they permit savers to liquidate their investments in a reasonable period of time. Businesses as
well find ample financing for their long-term capital needs and, in turn, produce goods and
services thereby contributing to economic growth.
A large volume of empirical research exists in attempting to explain the linkages
between a country’s stock market and its economic development (growth). However, much
of the literature’s findings are conflicting. For example, Demirguc-Kunt and Maksimovic
(1996), Levin and Zervos (1998) and Deb and Mukherjee (2008) found positive causal
effects of financial development on economic growth. For example, Levine and Zervos
conducted their analysis over 48 countries for the period from 1976 to 1993. Their focus was
on the impact of (the) stock market (development) on subsequent economic growth. They
used a number of stock market development indicators such as liquidity, size, and volatility
as well as bank development indicators. Their findings suggest a statistically significant
relationship between stock market and economic development and that each financial sector
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(equity market and banks) plays a separate role in the country’s economic development.
What this essentially means is that countries with better financial systems such as those with
large banks and well-organized and efficient stock markets tend to grow faster by providing
access to much needed funds for financially constrained economic enterprises. Finally, Atje
and Jovanovic (1993), using a similar approach as Levine and Zervos, also reported a
statistically significant correlation between economic growth and the stock market (relative
to GDP) for 40 countries over the period from 1980 to 1988.
By contrast, Harris (1997) using the same country sample (which included both
developed and developing), the same model and over the 1980 to 1991 period (as Atje and
Jovanovic), showed that this relationship is, at best, weak. Specifically, he demonstrated that
in the case developing countries, the stock market variable did not offer much incremental
statistical explanatory power (the same was also true for developed countries). Ram (1999)
also provided contrary evidence for both developed and developing countries that financial
development and economic growth are directly related. Finally, Dawson (2003), exploring a
panel of central and eastern European countries, further questioned the view that financial
development promoted economic growth.
Rajan and Zingales (1998) suggested that financial market development facilitates
economic growth by reducing the cost of external finance. Moreover, although Kletzer and
Pardhan (1987) and Beck (2002), among others, have argued for a direct link between
financial and economic growth in industrialized economies than in emerging economies, Fry
(1975) reported that emerging countries (being at their early stage of development) benefit
more from financial sector development than mature economies. Moreover, Arestis et al.
(2001) tested both banks’ and stock markets’ roles in promoting economic growth and
found that the effects of the former are more powerful than those of the latter. Specifically,
the authors advocated that the stock markets’ contribution to economic growth may have
been exaggerated by studies that employed cross-country growth regressions.
In general, well-organized stock markets perform their allocative and disciplinary
tasks effectively and directly contribute to the welfare of the economy by providing needed
liquidity to market participants. In emerging economies, however, the regulatory system
(infrastructure) is not well-developed or is incomplete and thus stock markets may hurt the
country’s international competitiveness and stall the domestic economy’s development (or
growth) trajectory. Thus, established as well as start-up companies may not be able to find
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financing to expand their productive operations creating, in turn, inefficient financial
markets (that is, including banks and other institutions besides the stock market) and
subjects them to harmful swings and higher volatility. The above situation, renders the
financial system (and the stock market) unable to funnel funds to the real economy, further
undermines the financial system and financial stability, and stifles economic growth.

III. METHODOLOGY AND DATA

The main variables we examine in this study are: stock markets (proxied by each
country’s general equity index, see Appendix), gross domestic products (GDP), government
gross fixed capital formation (GFCF), two interest rates (one short-term and one long-term),
and inflation (based on each country’s consumer price index). The emerging economies are
Argentina, Brazil, Chile, the Czech Republic, Estonia, Hungary, Iceland, India, Indonesia,
Mexico, Poland, South Africa, Slovak Republic, and Turkey. All series are quarterly,
spanning from 1995 to 2014. Data sources included OECD, Datastream, and the Fed’s
FRED.
The methodological design consists of the following steps. First, we must check for
stationarity in each variable. If they are stationary, individually, then a stable long-run
relationship may exist between them and the use of ordinary least squares methods may be
appropriate. The second step is to check for cointegration between GDP growth (or GFCF
growth) and the stock market index. If cointegration exists, then the last step would consist
of the estimation of an error-correction (EC) model (see Engle and Granger, 1987) and
some causality tests for the cointegrated series. The importance of the EC specification rests
on his ability to capture the partial adjustments that one variable makes to a shock
experienced by another variable. We begin with some descriptive statistics on selected series
for all countries.

A. Descriptive Statistics
Table 1 presents some descriptives (means, maximum and minimum values and
standard deviations) for GDP and GFCF growth rates, and the change in short-term
interests rates (in Panel A) and stock market growth rates (in Panel B) for all countries. From
Panel A we observe that South Africa had the highest GDP growth rate (7.46%) during the
period examined while Mexico had the lowest (0.65%). Several countries such as Argentina,
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Estonia, Iceland, Slovak Republic, and Turkey experienced sharp fluctuations in their GDP
growth as evidenced by their min and max values as well as their standard deviations.
Turkey, Indonesia and Argentina had the highest growth in gross fixed capital ranging from
6.73% to 3.29% while the Czech Republic had the lowest growth (0.97%). As regards the
change in the nominal short-term (3-month Treasury bill) interest rates, Argentina and
Turkey witnessed the highest variability, whereas Iceland witnessed the lowest variability.
Real short-term rate changes also exhibited similar patterns abut are omitted from the table
for the sake of space preservation.
Panel B of the table shows each country’s stock market growth rates along with
some other statistics. From the values, it can be seen that Turkey experienced the highest
stock market growth (7.18), followed by Mexico (4%), while the Slovak and the Czech
Republics experienced the lowest growth rates (0.07% and 0.89%, respectively). Iceland and
Turkey had the highest stock market volatility, as evidenced from their standard deviations
(19.78% and 19.18%, respectively), whereas Chile and South Africa recorded the lowest
volatility (7.23% and 8.0%, respectively).
Figure 1 illustrates each country’s (log of) GDP and (log of the) stock market index
(SP) over the period examined, 1995 to 2014. From the graphs, one can see that each
country’s GDP remained roughly flat while the paths of their stock market showed some
trends. For example, Argentina’s, Estonia’s and Turkey’s stock markets experienced steeper
advances than those of Brazil, Chile, Hungary, Indonesia, Mexico, Poland, or South Africa.
By contrast, while Iceland’s stock market followed a steep advance during the mid1990s and
early to mid2000s, it sharply dropped in 2007 due to the global financial crisis of 2007/8, the
stock markets of the Czech Republic, India, and Slovak Republic remained rather flat. These
observations corroborate the descriptive statistics reported above. Thus, one message from
the graphical analysis is that each country’s stock market appeared to follow its own trend
irrespective of the domestic development conditions (as reflected in GDP figures).

B. Unit root and cointegration tests

We refer to the order of integration of a series as I(d) if d the number of differences
in the series so as to become stationary. Therefore, it follows that a series is stationary if I(0)
and I(1) (that is, it contains a unit root) if it needs to be differenced once. One approach to
check for stationarity is the Augmented Dickey Fuller (ADF) (Dickey & Fuller, 1979) test.
8
The ADF unit root test assumes that the error terms are uncorrelated across time and is
based on the following regression equations:
k
∆yt = α + βyt-1 + ∑ γj ∆yt-j + εt (1a)
j=1

k
∆2 yt = α + β∆yt-1 + ∑ γj ∆2 yt-j + εt (1b)
j=1

where y is the series under consideration, ∆ the difference operator, and k the number of
lagged differences included in order to capture any autocorrelation. Eq. (1a) tests for a single
unit root whereas eq. (1b) for two unit roots. The optimal number of k is chosen so as to
make the Ljung–Box portmanteau statistic fail to reject the null hypothesis of no serial
correlation in the residuals in Eqs. (1a) and (1b). Essentially, this test is a pseudo t-statistic
for the null hypothesis H0: β = 0. In Panel A of Table 2, we only report the probability
values for each series, which should be less than 0.05 for a stationary series, or greater than
0.05 for a non-stationary series (or one containing a unit root).
However, the (Augmented) Dickey–Fuller tests have been criticized on the grounds
that their failure to reject a unit root may be attributed to their weak power against stationary
alternatives. The KPSS (Kwiatkowski et al., 1992) test is an alternate test of the null
hypothesis of stationarity against the alternative of a unit root. This procedure is considered
as a complement to the ADF test. The KPSS test statistic involves the following equation:

ημ = T-2 Σ [S2t / s2(L)] (2a)

where
T
St = Σ ei t = 1, 2, … , T (2b)
t=1

and
T L T
s2 = T-1 Σ e2t + 2T-1 Σ { 1 – [s/(L+1)]} Σ et et-s (2c)
t=1 s=1 t=s+1

The et are the residuals obtained by regressing the series being tested on a constant, T
is the number of observations and L is the lag length. If the test statistic exceeds the critical
values, the null hypothesis of stationarity is rejected in favor of the unit root alternative. The
results from this test are given in Panel B of Table 2. The null hypothesis of stationarity in
the levels of each variable is clearly rejected as is also the null of stationarity in first

9
differences of the two series. Therefore, these tests show unambiguously that both GDP and
SP series share similar properties, that is, they are nonstationary in the levels and contain a
unit root.
Engle and Granger (1987) define cointegration as the possibility that two or more
variables share a common stochastic trend, even though the variables may wander freely and
independently. Cointegration tests thus are employed to detect any stable long-run
relationships between variables. More formally, two variables like GDPt and stock price
index, SPt, are said to be cointegrated if their difference εt = GDPt – b SPt is I(0). The
equilibrium error, εt, can be estimated from the regression

GDPt = a + β SPt + δt (3)

where β is an estimate of b and (a+δt) provide an estimate of εt. The same approach applies
to the GFCF and SP variable pair.
We test for cointegration between GDP and SP by applying the ADF test to the
residual series δt from the above equation. Specifically, the test is based on the following
regression equation:
k
∆δt = θδt-1 + ∑ θj δt-1 + Ψt (4)
j=1

where k is the number of lagged differences included to reflect any autocorrelation and is
selected such that the Ljung–Box Q-statistic fails to reject the null hypothesis of no serial
correlation in the residuals of eq. (4). The test, again, is a pseudo t-statistic for the null
hypothesis of θ = 0. Because these residuals have zero mean, no intercept is included in
these tests. The null hypothesis of no cointegration is rejected when the t-statistic is negative
and greater (in absolute terms) than the critical values, at the conventional 5% level. This
suggests that the residuals from this regression would be I(0).
The results from the test are reported in Panel C of Table 2. From these findings, it
is evident that the null of no cointegration is accepted for all countries since the t-statistics
are negative and statistically significant (at the 5% level). The results from the GFCF and SP
variables also showed absence of cointegration and are omitted them from the table for the
sake of space conservation (but are available upon request). What these findings actually
mean is that in these emerging economies the stock market does not follow or adjust to the
real economy (as measured by GDP or capital formation growth) in the long run making
10
both sectors (the financial and the real) disconnected. Thus, effective or efficient channeling
of funds from the financial sector to the real economy may not take place in these
economies rendering economic growth slower than it should.
A further interpretation of the absence of cointegration between the stock market
and each of the two economic development indicators might be the fact that the stock
market on its own may not lead to economic growth. Perhaps, when combined with other
supportive economic/financial measures such as public investment and expenditures, a well-
functioning banking system or foreign direct investment may contribute to the country’s
economic growth. We do not examine this possibility in this paper but leave it for the future.

C. Vector autoregression specification

Given that there are no linear combinations of the two variables that are stationary,
we proceed with the estimation of a VAR for the first differences of the two variables. The
VAR is of the following form:

y1t = β10 + β11 y1t-1 + α11 y2t-1 + u1t (5a)

y2t = β20 + β21 y2t-1 + α21 y1t-1 + u2t (5b)

where y1t and y2t are GDP growth and nominal stock returns, respectively, and u1t, u2t are
error terms. This model can capture the short-run dynamic behavior between the two time
series through the α11 and α21 coefficients. Coefficients β11 and β21 capture own variable
dynamic behavior (impact) on its current value. For instance, if one or more of the α11
coefficients (if more than one lag is required) are nonzero and statistically significant,
changes in the stock market will have a short-run effect on the GDP growth. Similarly, if at
least one of the α21 coefficients is nonzero and statistically significant, movements in the
GDP growth will affect the stock market index in the short run. Finally, the error terms, u1t
and u2t are stationary random processes intended to capture other relevant information,
which is not contained in the lagged values of the two variables. In other words, this
specification represents an appropriate setting for examining the Granger-causality (or lead-
lag relations) between the variables. Finally, by analogy the same specification applies to the
GFCF and SP variables.

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 A potential problem in estimating the VAR model is how to determine the optimal
lag structure because if misspecified the empirical estimates will be biased and will simply
reflect the imposed lag specification. A way to circumvent this problem is to use a lag-
selection criterion such as Akaike’s (1969) Final Prediction Criterion (FPE). This criterion is
given by
T

FPEy1(p,k) = {(T + p + k + 1) / (T − p − k – 1)}{Σ(∆y1t - ∆p y1t)2/ T}

(6)
t=1

where T is the number of observations, y1t is the actual change in the GDP variable from

period t − 1 to t, ∆p y1t is the predicted change in the variable during the same period and (p,

k) is the lag structure that minimizes the FPE. The predicted value is obtained by OLS
regression on Eqs. (5a) and (5b) with a pre-selected lag structure on GDPt-i. The first
bracketed term of Eq. (6) captures the estimation error, while the second term measures the
average modeling error. In essence, FPE balances the bias from choosing too small a lag
order with the increased variance of a higher lag-order specification.

D. Panel data analysis

In this part of the analysis, we estimate a balanced panel specification (i.e. conduct
longitudinal analysis) in order to examine how variables, or the relationships between them,
change over time. Conventional time series data and specifications would often require a
long run of data simply to be able to conduct any meaningful hypothesis tests. However, by
pooling cross-sectional and time series data (such as countries over time), we can increase
the number of degrees of freedom, boost the power of the test and allow us to gain
flexibility in modeling differences in behavior across countries.
The basic framework for this discussion is a regression model of the form

yit = α + β xit + εit (7)

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where yit is the dependent variable, is the intercept term, β is a k×1 vector of parameters to

be estimated on the explanatory variables, and xit is a 1 × k vector of observations on the

explanatory variables, t,= 1, . . . , T and i = 1, . . . , K.

There are two general panel estimator approaches that can be used, fixed effects
models and random effects models. The simplest type of fixed effects models is to allow for an
intercept in the regression model to differ cross-sectionally but not over time, while all of the
slope estimates are fixed both cross-sectionally and over time.
To see how the fixed-effects model works, we decompose equation’s (7) disturbance
term, εit , into an individual specific effect, μi, and the remaining disturbance, vit, that varies
over time and across countries. Specifically,

εit = μi + vit (8)

Thus, equation (7) could be rewritten as

yit = α + β xit + μi +vit (9)

In essence, one can think of μi as capturing all of the variables that affect yit cross-
sectionally but do not vary over time.1
By contrast, the random effects approach proposes different intercept terms for each
country (entity) but, again, these intercepts are constant over time (the relationships between
the independent and dependent variables are assumed to be the same cross-sectionally and
over time). The main difference is that the intercepts for each cross-sectional entity are
assumed to arise from a common intercept α (which is the same cross-sectionally and over
time), plus a random variable ei that varies cross-sectionally but is constant over time. That
random variable measures the random deviation of each entity’s intercept term from the
overall intercept α. The random effects panel model can be expressed as

yit = α + β xit + uit, uit = ei + vit (10)

1 One could augment the above specification by including an intercept in the regression and allow it to vary
over time but assume it to be the same across entities at each given point in time. The model would be
renamed time-fixed effects model. One would employ such a specification if one thought that the average value
of the dependent variable changes over time but not across countries (or cross-sectionally).
13
where xit is the vector of explanatory variables. This specification assumes that the cross-
sectional error term, ei, has zero mean, is independent of the individual observation error
term (vit), has constant variance and is independent of the explanatory variables.
In general, the fundamental difference between fixed and random effects
specifications is whether the unobserved individual effect includes elements that are
correlated with the regressors in the model, not whether these effects are stochastic or not.
To decide on the appropriate effects model, we will use the Hausman specification test.
Specifically, we estimate the following panel specification:

Yit = α0 + α1Yit-1 + α2 ∆SPit + α3 ∆IRit + β1Yit • ∆IRit + νit (11)

where Yit are either GDP growth or GFCF growth (for i = 1, . . ., N=14, t = 1, . . ., T=80,
per country) also appearing with one-period lag as independent variables, ∆SPit is the change
in stock prices (or nominal stock returns), ∆IRit is the change in the short- or long-term rate
in each country, Yit•∆IRit is an interaction term, and, finally, νit is the idiosyncratic error term.
The two interaction terms, GDP growth with the interest rate and GFCF growth with the
interest rate, are included to see if real economic growth is related to changes in the interest
rates in addition to the stock market’s movements. Additional explanatory variable lags as
well as the rate of inflation variable are included in the model as we estimate six different
model variants.

IV. MAIN EMPIRICAL RESULTS AND DISCUSSION

The first step in the main empirical analysis is to determine the optimal lag structure
for each equation using the Final Prediction Error Criterion. The criterion indicated that two
lags for each independent variable in each equation was the optimal lag length. Therefore, we
proceed with the estimation of the system of Eqs. (5a) and (5b) using the Seemingly
Unrelated Regression (SUR) method to gain efficiency. We begin with the results on the
dynamic interactions between a country’s economic growth (GDP) and stock market (SP)
shown in Table 3 and in Figures 2 and 3. Specifically, Table 3 contains the estimates of the
VAR models for each country showing the short-term, dynamic interactions between GDP
growth, ∆GDP, and stock returns, ∆SP, in Panel A, and those between gross fixed capital
formation growth, ∆GFCF, and stock returns in Panel B. Figure 2 exhibits the reaction of
14
GDP growth to a shock in the stock market for each country while Figure 3 exhibits the
reverse. Figures 4 and 5 show the mutual impacts of gfcf and stock returns. These graphs
were derived from a Choleski one-standard deviation change (shock) in each of the variables
and traced the impact on the other.

A. VAR Results
A.1 Dynamics between GDP and SP
From Panel A of Table 3 we note general absence of short-term interactions
between economic development (growth rate) and stock market changes during the period
of investigation. Specifically, we observe strong interactions only in the cases of Argentina
and Poland (as seen by the statistical significance of the ∆SP coefficients in the first
equation) suggesting that stock market changes did advance domestic economic
development in these two countries. In most other cases (Brazil, Chile, Czech Republic,
Estonia, Hungary, Mexico, S. Africa, Slovak Republic and Turkey) the stock market
marginally contributed to economic advancement. When investigating the contribution of
the domestic economy to the stock market, we found that the former was not always
important for the stock market. Specifically, in Hungary there was some positive feedback
from the economy to the stock market, while in countries like Chile, India and Indonesia we
saw the reverse. Finally, for the remaining countries there was no interaction between the
two magnitudes. Overall, we can (tentatively) conclude that there were no short-term,
dynamic inter-relationships between the two magnitudes in these emerging markets.
Figure 2 shows the dynamic impact (reaction) of a shock in the stock market on a
country’s economy extended over twelve periods (or 4 years, given quarterly observations).
Red dotted lines are the one-standard deviation error bands. In general, we note that stock
market innovations (shocks) seem to impact the economy albeit to varying degrees in each
country. Specifically, higher positive impact is observed for Argentina, the Czech Republic,
Estonia, Mexico and Turkey, while lower positive impact for Chile, Iceland, Indonesia,
Poland and the Slovak Republic. The only exception is the negative reaction of the economy
to stock market movements which took place in Poland. Figure 3 illustrates the reverse, that
is, the reaction of the stock market to economic movements. From these graphs, we see that
economic advances marginally contribute to the stock market and in many cases such
contribution turns the stock market to a negative territory (as in the cases of Argentina,
15
Brazil, Chile, Estonia, Hungary, Indonesia, S. Africa and Turkey). Such findings tentatively
imply that movements in the domestic economy are not reflected in these countries’ stock
markets and may pose huge difficulties for firms to obtain financing to fulfil their capital
spending plans. In other words, there is a disconnection between a country’s economy and
stock market and such a disconnection typically renders economic activity (consumption,
investment and saving, for example) costly (inefficient) for households, businesses and the
government alike.

A.2 Dynamics between GFCF and SP

From the VAR estimates, shown in Panel B of Table 3, we see that stock market
movements added little to domestic fixed capital formation in most countries. Specifically, in
Hungary, Iceland, India and Indonesia we observed complete absence of the stock market’s
influence on domestic infrastructure. In all other cases, we noted a marginal influence of the
stock market on fixed capital formation and often with a lag. An even disappointing picture
emerges with the results regarding the impact of gross fixed capital formation on a country’s
stock market. There are no short-term connections between the two magnitudes in almost
all countries despite marginal influence in the cases of the Czech Republic, Poland and the
Slovak Republic. In Brazil’s case, the relationship is negative (albeit marginal).
Figure 4 illustrates the impulse response of a country’s gross fixed capital formation
growth to shocks from the stock market extended over twelve periods. As with the cases of
gdp growth, we note that the stock market affects a country’s capital formation positively
and to varying degrees. Some additional observations are in order. First, such impact
surfaces much greater in the cases of Argentina, Poland, S. Africa and Turkey but lesser in
the cases of Ireland, India, Mexico and the Slovak Republic. Second, the exception to the
stock market’s positive contribution to a country’s capital formation is Indonesia in which
the stock market’s movements seemed to depress the country’s capital growth. Third, in
many instances stock market shocks appeared to last for several years (up to three as shown
in the graphs) while in others (Czech Republic, Iceland, India) only lasted a year or less.
Finally, in two cases (Brazil, S. Africa) prolonged stock market shocks may depress gross
capital formation despite initially boosting such formation. Thus, it may be concluded that
favorable innovations emanating from the stock market may support a country’s domestic
infrastructure.
16
 Figure 5, plots the dynamic responses of the stock market to changes in gross fixed
capital formation in each country. In general, we notice the heterogeneity in the market’s
reactions, ranging from positive to negative to almost flat (no) reactions. Specifically, in the
cases of Argentina, Czech Republic, Hungary, Iceland, Poland and Turkey we observe a
positive response, while for Brazil, Chile, Estonia, Indonesia (in part) and S. Africa a
negative response. Finally, for Mexico and Indonesia we see a flat stock market response to
gross capital formation.
In general, the absence of a significant relationship between the stock market and the
real economy (as defined above) may be due to the use of a single financial market indicator
(the stock market) rather than several stock market development indicators such as stock
market size and liquidity (see Levine and Zervos, 1998). In the next section, we estimate a
panel specification with additional variables which should show the dynamic and true
relationship between a country’s stock market and economic development.

B. Panel Results
In this section, we report some preliminary and the main results from the estimations
of the various panel models. These results are shown in Tables 4 and 5, respectively.
Specifically, we first conducted a panel unit root test, the results of which are shown in Panel
A of Table 4, and then a panel (multivariate) cointegration test, the findings of which are
reported in Panel B of Table 4. Finally, we estimated six different panel models by
augmenting the benchmark models (I), each with GDPG growth or GFCF growth as the
dependent variable, with additional variables as well as interaction terms, depicted in Table 5
(in two panels).

B1. Panel Unit Root and Multivariate Cointegration Tests

A number of frameworks have been developed for implementing unit root tests in
panel data (Levin and Lin, 1993, Pedroni, 1999, 2000, and Im et al., 1997, to name but a few)
in recent years. The null hypothesis in panel unit root tests is that a unit autoregressive root
exists for every country in the panel, contrary to the individual series test which has as the
null a unit root in that series. In this subsection, we employ the group mean t statistic test
developed by Im et al. and the findings are shown in Table 4, Panel A. Each statistic is
constructed to have an asymptotic standard normal distribution. In addition, we test each
17
variable with an individual intercept, with an intercept and a trend, and for up to five lags.
All statistics point strongly to the presence of a single stochastic trend in each of the three
series for all countries in the panel.
In view of the above findings and the earlier findings of no cointegration between
the two main magnitudes, stock prices and GDP (or GFCF), we decided to conduct a
multivariate cointegration test on stock market, real economic growth and the long-term
interest rate (another control variable along with the short-term interest rate and the rate of
inflation). The pooling used in panel cointegration tests can significantly improve the power
relative to single country-based tests. In this analysis, we use Pedroni’s (1999) residuals-based
tests of the null of no cointegration, which are appropriate for heterogeneous panels. The
specific test is based on Levin and Lin, which pools over the within dimension (numerator
and denominator components of the test statistics are summed separately over the N
dimension).
Under the null hypothesis, the variables are not cointegrated for each panel member.
The alternative asserts that a cointegrating vector exists for each individual, although this
vector may be unique for each individual. The panel t statistics test the null that the first
order autoregressive coefficient ρi = 1 for all i against the alternative ρi = ρ < 1 for all i. In
other words, the alternative hypothesis for the panel test asserts that the autoregressive
coefficient in the auxiliary regression of the cointegrating residuals is the same for every
individual. The results from this test are found in Panel B of Table 4.2
We report statistics with individual intercepts, intercepts and trend, and without any
of them. We conducted all tests for up to five lags. In general, the test statistics do not yield
an unambiguous conclusion about the existence of cointegration over the panel and the 5%
or better level. This result is simply the opposite of what we found when checking individual
country cointegration. Therefore, including a set of control variables in the cointegration
test, we find strong evidence of cointegration.3 As a result, the stock market, as a stand-alone
financial indicator, cannot lead to economic growth. However, when it is allowed to interact
with magnitudes such as interest rates, increased real public investment, and inflation then
economic growth will result. Stated differently, evidence of multivariate cointegration implies

2 We omitted the results from the group t statistics because they were similar.
3 The test was also conducted with the short-term rate in lieu of the long-term rate and the rate of inflation but
the results were qualitatively the same. Thus, they are omitted from the analysis but are available upon request.
18
that economic growth can induce stock market development as long as they are part of the
whole economic/financial system and never on its own.

B2. Panel Models Results

In this subsection, we report the results from six alternative cointegrating panel
specifications in Panels A and B of Table 5. We employ the “group-mean” panel, Fully
Modified OLS estimator (FMOLS) developed by Pedroni (2000, 2004). The FMOLS
estimator is shown to generate consistent estimates of the β parameters in relatively small
samples and it also controls for the (likely) endogeneity of the regressors and serial
correlation. At the bottom of each panel of the table, the within R-square, the F-stat and the
cross-section random χ2 (the latter for testing for correlated random effects, that is, the
Hausman test) values for each model are found. In all six cases for both panels, the p-values
associated with the test statistics (χ2) are higher than 0.05 and indicate that the restrictions
are not supported by the data and thus suggest that that a random-effects panel specification
could be employed.
Panel A of Table 5, presents the results for all six panel models when the dependent
variable is GDP growth. Model I, is the benchmark model and contains only the
contemporaneous and lagged stock market returns. This specification does not show any
economic or statistical significance of the stock market and its potential impact on GDP
growth. However, when augmenting the model with the lagged GDP growth variable
(Model II), the contemporaneous stock returns variable emerges as highly statistically
significant (at the 1% level). The same observation can be made for Model III in which we
added the contemporaneous and one lag of GFCG growth. Contemporaneous stock returns
and GFCF growth both surface as highly statistically and economically significant for GDP
growth. In general, in the remaining model variants (IV, with contemporaneous and one lag
of changes in short-term or long-term interest rate, V, with all above variables plus the
GFCF growth times the change in the interest rate interaction term, and VI, with all previous
variables plus the GDP growth times the change in the interest rate interaction term and the
rate of inflation) contemporaneous stock returns and GFCF growth all are seen as highly
statistically significant. The two interaction terms are, when entered separately in the models,
19
are also statistically significant (at the 5% level). Finally, the rate of inflation did not surface
as statistically significant in the last model version.
Turning to Panel B panel model results, when GFCF growth was the dependent
variable, we note that contemporaneous nominal stock returns exert a highly significant
impact on capital formation and this significance shows up in all six model variants. The
same observation can be made for GDP growth, which emerges as highly statistically and
economically significant for GFCF growth. Finally, the two interaction terms and inflation
also surface as significant, when entering the models separately.

C. Discussion of Findings
We have seen that when enriching the stock market – real economic activity
relationship with a set of control variables and estimating various panel specifications,
strong, dynamic interactions between the two magnitudes emerged. We found that, even
after controlling for other factors such as gross fixed capital formation, interest rates and
inflation rates, the stock market is positively and robustly correlated with contemporaneous
and future real economic development. Thus, stock market movements directly contributed
to a country’s economic development either through the production of goods and services
or the accumulation of real capital. In addition, in view of the significance of the interest
rates in these regressions it can be inferred that banking development also contributed to the
fostering of economic growth albeit in a different manner. Thus, in order to understand the
linkage between the financial (i.e., the stock market) and the real sector (economic activity or
public capital formation) of an emerging economy, it is important to include also the
banking sector because each sector provides different service bundles to the real economy
(see, Levine, 1996, and Levine and Zervos, 1996, 1998).
In sum, we observed a strong linkage between stock market development and
economic growth (chiefly proxied by GDP growth) for the emerging countries examined
here. However, we found that the stock market alone is not capable of boosting economic
development in these countries unless being part of a comprehensive financial system (which
includes banks) as well as investment in real capital. For example, gross fixed capital
formation is seen to have a considerable, economic and statistical, effect on economic
growth. After all, fixed capital formation is investment in fixed assets financed with funds
raised in the equity market. Thus, it can be inferred that stock markets and the real economy
20
were closely related and that stock markets had indeed contributed to economic growth
during the last few decades.
The implications for economic policy of the significant linkage between the stock
market and real economic activity are as follows. First, stock markets, as stand-alone, are not
able to induce economic development in emerging economies unless accompanied by a
sound financial system which includes banking development. Second, provision of public
fixed investment is necessary to foster economic as well as financial development in
emerging economies. In other words, the financial sector must be able to facilitate real
economic development in order for overall economic development to take place. And third,
government authorities should strive to also promote real investment rather than financial
investments since in the absence of the latter, economic development cannot occur in the
country. In addition, economic growth is not sustainable without a sound and efficient
financial sector which must be supported with real (fixed) capital accumulation.

V. Robustness tests
In this section, we perform several robustness checks to ensure that our models
stand the test(s) of sensitivity analyses when using alternative proxies for economic
development, stock market and models. We begin with the re-estimation of the VAR models
using alternative proxies for the main variables and conclude with estimating alternative
panel-type models.

A. Alternative variables
In our main VAR models, we employed GDP and GFCF growth, as proxies for
economic development, and the stock market, as the proxy for the country’s financial
development. In this exercise, we use each country’s industrial production index as an
alternative measure of economic development, the market excess returns (derived by
subtracting each country’s risk-free rate) and real stock returns (derived by subtracting the
country’s inflation rate, based on the consumer price index), and adding two sets of
dummies, one for each continent the country is located in and the other on the financial
crisis of 2008. Specifically, we define four continent dummies: the first dummy takes the
value of 1, if a country is in Europe and 0 otherwise, the second takes the value of 1, if the
country is in the Americas and zero otherwise, the third takes the value of 1, if the country is

21
located in Africa and 0 otherwise, and the fourth continent dummy takes the value of 1, if
the country is located in Asia and 0 otherwise. Each continent dummy enters the model
separately.
In general, when employing the above-mentioned variable proxies for real and
financial development in each country, we did not find any qualitative differences from the
results presented in Table 3 (VAR models results).4 In Panel A of Table 6, we report the
results from the various panel specifications (Table 5) with each continent dummy included
when GDP growth was the dependent variable.5 The table reports only the findings for each
dummy with the main variable results remaining the same. As seen from the panel, all four
continent dummies emerged as statistically insignificant (the exception was the Asian dummy
for the benchmark panel model). These findings suggest that the continent (location) in
which a country is located does not entail a (statistically significant) reason for a country’s
higher or lower economic growth when countries are examined in the aggregate. Thus it may
be generalized that stock markets do not seem to promote higher or lower economic
development based on the geographic region at which a country is located.

B. Alternative panel specifications

In this subsection, we estimate a fixed-effects panel model to see if the benchmark
random effects model was indeed the appropriate one. Panel B of Table 6 reports the results
for GDP growth as dependent variable (the results with GFCF growth variable were similar
and thus omitted). As can be seen, the variable coefficients are generally in line with the
benchmark panel model (Panel A, Table 5). The only difference was noted in the statistical
insignificance of the first interaction term (∆IR x GDP growth). Thus, the random effects
model, chosen on the basis of the Hausman’s model selection test, is seen as the right model
to explain the dynamics among a country’s economic development and capital market, along
with several other control variables.

VI. Conclusions
This paper re-examines the nature of the relationship between a country’s aggregate
stock market and general economic development for fourteen emerging economies for the

4 Results are not presented but are available upon request.

5 The results with capital formation (GFCF) growth variable are also omitted because they are very similar to
the ones with the GDP growth dependent variable panel model specifications.
22
period from 1995 to 2014 using quarterly data. The empirical analysis makes use of
cointegration, vector autoregressions, and panel methodologies to address the above issue
from various aspects.
In general, when we examined the stock market and economic development (by the
GDP growth rate and the gross fixed capital formation growth variables), via VAR analysis,
we did not find any meaningful relationship between the two. In fact, the results (both from
regressions as well as impulse response analyses) indicate a marginal contribution of the
stock market to either economic development indicators. However, when we augmented the
two main magnitudes with a set of control variables strong, dynamic interactions between
the two magnitudes surfaced. It was found that the stock market is positively and robustly
correlated with contemporaneous and future real economic development and, thus, it
directly contributed to a country’s economic development either through the production of
goods and services or the accumulation of real capital. Thus, it can be inferred that the stock
market alone is not capable of boosting economic development in these countries unless
being part of a comprehensive financial system (which includes banks) as well as investment
in real capital. This finding corroborates previous findings that the financial sector as a whole
contributes to overall economic development of an emerging economy.
The policy implications are clear. Government authorities must recognize that the
stock market alone is not a driver of economic development and that a sound, efficient
financial system (which includes banks) must be present in order to contribute and foster
economic development. The different roles played by the stock market and the banking
sector positively work in order to promote economic development.

23
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26
Table 1. Descriptive Statistics

Panel A: GDP growth, Gross Fixed Capital Formation growth, change in nominal Short-term Rate

Argentina Brazil Chile CzRep

gdpg gfcfg ∆rate gdpg gfcfg ∆rate gdpg gfcfg ∆rate gdpg gfcfg ∆rate
Mean 0.0072 0.0329 6.2411 0.0078 0.0247 -0.168 0.0099 0.0198 -0.0945 0.0056 0.0097 -0.134
Max 0.4904 0.2810 42.401 0.0701 0.1667 21.501 0.0423 0.1097 4.4556 0.0289 0.0898 7.2892
Min -0.058 -0.148 -4.112 -0.039 -0.129 -25.00 -0.036 -0.176 -4.432 -0.038 -0.054 -4.198
SDev 0.0203 0.0691 10.167 0.0145 0.0411 4.5132 0.0126 0.0465 1.2360 0.0098 0.0345 1.1561

Estonia Hungary Iceland India

gdpg gfcfg ∆rate gdpg gfcfg ∆rate gdpg gfcfg ∆rate gdpg gfcfg ∆rate
Mean 0.0102 0.0253 -0.0891 0.0050 0.0233 -0.3883 0.0071 0.0153 -0.0256 0.0176 0.0317 -0.0371
Max 0.4804 0.1750 5.1261 0.0221 0.0790 2.6811 0.0981 0.2447 0.7156 0.0669 0.1568 3.5812
Min -0.1131 -0.1851 -5.8410 -0.0332 -0.0439 -3.7601 -0.0836 -0.2861 -0.7921 -0.0168 -0.1054 -2.0001
SDev 0.0213 0.0715 1.4702 0.0089 0.0265 1.0872 0.0246 0.0875 0.2740 0.0138 0.0375 0.6261

Indonesia Mexico Poland S Africa

gdpg gfcfg ∆rate gdpg gfcfg ∆rate gdpg gfcfg ∆rate gdpg gfcfg ∆rate
Mean 0.0102 0.0423 -0.2071 0.0065 0.0303 -0.6063 0.0101 0.0223 -0.3456 0.0746 0.0277 -0.0861
Max 0.5404 0.3601 10.561 0.0271 0.1340 11.151 0.0591 0.1247 4.0356 0.0189 0.0958 6.1312
Min -0.0531 -0.1481 -12.810 -0.0442 -0.0691 -21.191 -0.0326 -0.0761 -3.4021 -0.0161 -0.0654 -2.6110
SDev 0.0143 0.0185 3.3902 0.0119 0.0435 3.6972 0.0106 0.0355 1.1430 0.0038 0.0265 1.0461

SlovRep Turkey
gdpg gfcfg ∆rate gdpg gfcfg ∆rate
Mean 0.0182 0.0153 -0.0861 0.0099 0.0673 -0.8533
Max 0.1104 0.2061 3.4261 0.0491 0.2210 41.181
Min -0.0881 -0.2281 -4.2340 -0.0602 -0.0821 -37.151
SDev 0.0213 0.0675 1.1502 0.0219 0.0735 8.2232

Panel B: Stock Market growth

Argentina Brazil Chile CzRep Estonia Hungary Iceland India

Mean 0.0355 0.0362 0.0167 0.0089 0.0287 0.0345 0.0091 0.0256
Max 0.4789 0.2886 0.1976 0.2177 0.4933 0.3582 0.2313 0.3421
Min -0.5017 -0.3978 -0.1876 -0.4679 -0.4877 -0.4383 -1.2467 -0.3613
StDev 0.1855 0.1288 0.0723 0.1088 0.1676 0.1278 0.1978 0.1143

Indonesia Mexico Poland S Africa SlovRep Turkey

Mean 0.0295 0.0402 0.0267 0.0259 0.0007 0.0718
Max 0.3449 0.2876 0.2976 0.1487 0.3433 0.6482
27
Min -0.4517 -0.2578 -0.3872 -0.3009 -0.2237 -0.3843
StDev 0.1235 0.0988 0.1123 0.0808 0.0876 0.1918

Notes: growth rates are computed using the following formula: ln(Pt/Pt-1)*100, where Pt is either GDP or
GFCF; ∆ denotes change; StDev is the standard deviation; period is 1995:II to 2014:IV.

Table 2. Tests for Unit Root, Stationarity and Cointegration

Panel A: test for unit root (ADF)

Argentina Brazil Chile CzRep Estonia Hungary Iceland

Log(GDP) 0.9718 0.9460 0.9908 0.7867 0.5546 0.5234 0.5656
Log(SP) 0.9970 0.7487 0.9067 0.3867 0.4335 0.3386 0.1090
Dlog(GDP) 0.0054* 0.0000* 0.0000* 0.0006* 0.0291* 0.0001* 0.0017*
DLog(SP) 0.0321* 0.0000* 0.0000 * 0.0000* 0.0000* 0.0000* 0.0003*

India Indonesia Mexico Poland S. Africa SlovRep Turkey

Log(GDP) 0.9999 0.9976 0.4134 0.6645 0.9054 0.9059 0.9544
Log(SP) 0.9978 0.9876 0.9811 0.7867 0.7765 0.4078 0.9777
DLog(GDP) 0.0000* 0.0000* 0.0000* 0.0102* 0.0019* 0.0000* 0.0000*
DLog(SP) 0.0000* 0.0000* 0.0000* 0.0000* 0.0000* 0.0003* 0.0000*

Panel B: stationarity test (KPSS)

Argentina Brazil Chile CzRep Estonia Hungary Iceland

Log(GDP) 1.7418 1.4560 1.9408 1.7647 1.5146 1.4234 1.5643
Log(SP) 0.9070 0.8587 0.8967 0.8567 0.7435 0.7886 0.9540
Dlog(GDP) 0.2254* 0.2000* 0.2100* 0.2406* 0.2391* 0.2101* 0.2417*
DLog(SP) 0.3021* 0.3100* 0.3200 * 0.3300* 0.3100* 0.2900* 0.2403*

India Indonesia Mexico Poland S. Africa SlovRep Turkey

Log(GDP) 1.7929 1.9376 1.7114 1.6455 1.6054 1.5549 1.7542
Log(SP) 0.9788 0.9687 0.9121 0.8567 0.7665 0.8078 0.7977
DLog(GDP) 0.2560* 0.3020 * 0.3300* 0.2102* 0.3219* 0.2610* 0.2540*
DLog(SP) 0.3100* 0.2780 * 0.3400* 0.2400* 0.2700* 0.3103* 0.3600*

Panel C: Cointegration test between Log(GDP) and Log(SP)

Argentina Brazil Chile CzRep Estonia Hungary Iceland

ADF -4.0341* -4.1234* -4.1132* -4.7182* -3.7781* -4.6541* -3.9989*
k 4 4 4 4 4 4 4

India Indonesia Mexico Poland S. Africa SlovRep Turkey

ADF -4.0718* -3.9987* -4.0767* -3.8978* -3.9987* -4.0334* -4.1234*
k 4 4 4 4 4 4 4

28
Notes: Panels A and B: 5% critical value for the ημ is 0.463; the null of ADF is non-stationarity, while that of the
KPSS is stationarity, against their respective alternative hypotheses; the reported test statistics are computed
using a lag length of 4;. Panel C: ADF numbers are the Augmented Dickey–Fuller pseudo t-statistics for testing
the null hypothesis that θ = 0 in Eq. (4); the 5% critical value is −3.37 (see Engle & Yoo, 1987, p. 157); k’s lag
length (4) is selected so as the Ljung–Box Q-statistic fails to reject the null of no serial correlation in the
residuals of Eq. (4); * denotes statistical significance at the 5% level.

Table 3. VAR Model Results

Panel A: ∆GDP and ∆SP variable pair

Argentina Brazil Chile Czech Rep
∆GDP ∆SP ∆GDP ∆SP ∆GDP ∆SP ∆GDP ∆SP
Variable Coefficient
(Std. error)
∆GDPt-1 0.3847* -0.7597 -0.2717** -2.0801 0.1456 0.2456 0.1478 0.1944
(0.113) (0.651) (0.116) (1.154) (0.116) (0.020) (0.104) (0.166)
∆GDPt-2 0.1879 -0.3445 0.1308) -0.0359 -0.0467* -1.3461* 0.3876* -0.5867
(0.107) (0.245) (0.112) (0.022) (0.012) (0.645) (0.098) (0.441)
∆SPt-1 0.0187** 0.0498 0.0459* 0.3240* 0.0376** 0.3878* 0.0378* 0.3559*
((0.010) (0.035) (0.012) (0.122) (0.020) (0.187) (0.011) (0.121)
∆SPt-1 0.0271* -0.0916 0.0186 -0.0456 0.0208 -0.0612 0.0045 -0.1675
(0.010) (0.067) (0.010) (0.033) (0.017) (0.045) (0.003) (0.143)
Constant 0.0020 0.0465** 0.0050* 0.0401* 0.0077* 0.0215** 0.0027* 0.0108
(0.002) (0.024) (0.020) (0.020) (0.023) (0.011) (0.001) (0.086)
R2-bar 0.3978 0.2309 0.2176 0.1095 0.1192 0.1697 0.5278 0.1206

Estonia Hungary Iceland India

∆GDPt-1 0.2747* -0.5787 0.5447** 3.8011** -0.4456** 0.2056 0.2528* 2.9444**
(0.103) (0.451) (0.126) (2.054) (0.106) (0.015) (0.104) (0.966)
∆GDPt-2 0.2459* -0.7745 0.0408) -6.5789* -0.0337 0.4161 0.1236 0.3167
(0.117) (0.551) (0.032) (2.022) (0.021) (0.345) (0.094) (0.301)
∆SPt-1 -0.0287 0.4598* 0.0159* 0.3340* 0.0236 0.6878* -0.0138 0.2219*
((0.011) (0.015) (0.005) (0.112) (0.020) (0.287) (0.011) (0.118)
∆SPt-1 0.0601* 0.0076 0.0386 0.0446 0.0221 -0.2212** 0.0005 -0.1015
(0.013) (0.061) (0.020) (0.033) (0.017) (0.115) (0.003) (0.103)
Constant 0.0021 0.0285 0.0010 0.0321* 0.0107* 0.0015 0.0107** -0.0348
(0.002) (0.021) (0.007) (0.023) (0.003) (0.011) (0.001) (0.026)
R2-bar 0.4438 0.2339 0.4676 0.2895 0.2592 0.3597 0.0878 0.2056

Indonesia Mexico Poland S. Africa

∆GDPt-1 0.3271* 1.5787 0.2247* 0.3811 -0.2026 -0.9456 0.4828* 2.5144
(0.113) (0.081) (0.126) (0.214) (0.126) (0.715) (0.124) (1.966)
∆GDPt-2 0.1129 -2.3415* 0.0348 -0.9289 0.0417 0.7861 0.0206 -2.0167
(0.097) (1.151) (0.022) (0.722) (0.031) (0.545) (0.014) (1.301)
∆SPt-1 0.0247 0.3018* 0.0451** 0.1640 0.0213* 0.3578** 0.0208* 0.1419
((0.019) (0.115) (0.005) (0.112) (0.015) (0.187) (0.006) (0.108)
∆SPt-1 0.0701 -0.1376 0.0150 -0.0346 0.0821 -0.0741* 0.0075 -0.1925
(0.053) (0.081) (0.012) (0.023) (0.077) (0.035) (0.005) (0.143)
Constant 0.0048 0.0345 0.0021* 0.0351* 0.0107* 0.0185 0.0027** 0.0228
(0.032) (0.034) (0.001) (0.013) (0.003) (0.010) (0.001) (0.016)

29
R2-bar 0.1988 0.1659 0.4536 0.0449 0.0892 0.1097 0.4978 0.0756
Slov Rep Turkey
∆GDPt-1 0.2812* 0.3217 0.1337 -1.1211
(0.103) (0.181) (0.116) (0.914)
∆GDPt-2 0.1729* 0.2215 0.0908 -0.2859
(0.077) (0.151) (0.072) (0.122)
∆SPt-1 0.0397** 0.4918* 0.0531* 0.3440*
((0.019) (0.105) (0.005) (0.102)
∆SPt-1 -0.0241 -0.0256 -0.0110 -0.0816
(0.013) (0.021) (0.010) (0.063)
Constant 0.0096* -0.0745 0.0048 0.0621**
(0.002) (0.054) (0.003) (0.033)
R2-bar 0.2018 0.2649 0.2366 0.1149
Panel B: ∆GFCF and ∆SP variable pair
Argentina Brazil Chile Czech Rep
∆GFCF ∆SP ∆GFCF ∆SP ∆GFCF ∆SP ∆GFCF ∆SP
Variable Coefficient
(Std. error)
∆GDPt-1 0.3217* 0.3897 0.0517 -0.8801* 0.2956* 0.1156 0.1462 0.7744*
(0.123) (0.361) (0.046) (0.424) (0.116) (0.102) (0.114) (0.566)
∆GDPt-2 0.1529 -0.1145 -0.2139 -0.1159 0.0107 -0.3011 -0.1576* 0.3467
(0.107) (0.104) (0.110) (0.102) (0.010) (0.245) (0.108) (0.241)
∆SPt-1 0.0021 0.0478 0.0769* 0.3250* 0.1676* 0.3438* 0.0876* 0.3659**
((0.014) (0.035) (0.052) (0.122) (0.080) (0.107) (0.041) (0.121)
∆SPt-1 0.1571* -0.1216 0.0586 -0.0226 0.0881 -0.1266 -0.0115 -0.1725
(0.010) (0.087) (0.040) (0.023) (0.067) (0.115) (0.010) (0.143)
Constant 0.0130 0.0025 0.0240* 0.0481* 0.0088 0.0135 0.0078* -0.0180
(0.012) (0.020) (0.010) (0.024) (0.063) (0.011) (0.004) (0.016)
R2-bar 0.4078 0.2009 0.1766 0.1395 0.2092 0.1567 0.1078 0.1876

Estonia Hungary Iceland India

∆GDPt-1 0.2037* -0.2187 0.4477** 0.8911 -0.3086** 0.3056 -0.1928 -0.2844
(0.103) (0.151) (0.164) (0.654) (0.126) (0.215) (0.114) (0.166)
∆GDPt-2 0.2484* -0.2145 0.3308* -0.6089 -0.0344 0.2461 -0.1356 -0.1567
(0.111) (0.151) (0.132) (0.522) (0.020) (0.145) (0.094) (0.101)
∆SPt-1 -0.0657 0.4618* 0.0019 0.3640* 0.0586 0.6228** 0.0800 0.3219*
((0.011) (0.115) (0.005) (0.112) (0.030) (0.187) (0.061) (0.128)
∆SPt-1 0.1401* 0.0066 0.0236 0.0156 0.0811 -0.2290** 0.0455 -0.0915
(0.011) (0.061) (0.020) (0.093) (0.067) (0.115) (0.033) (0.083)
Constant 0.0101 0.0275 0.0036 0.0131 0.0187 -0.0036 0.0907** -0.0350
(0.092) (0.021) (0.002) (0.013) (0.013) (0.011) (0.001) (0.026)
R2-bar 0.2338 0.2449 0.6176 0.1695 0.1292 0.3744 0.0998 0.0956

Indonesia Mexico Poland S. Africa

∆GDPt-1 -0.2571* 0.1487 0.2743* -0.0511 0.4026* 1.0356* 0.6428* -0.3124
(0.123) (0.110) (0.116) (0.024) (0.126) (0.515) (0.104) (0.286)
∆GDPt-2 0.2911 0.0015 0.2248* 0.1389 0.3171* -0.6761 -0.0846 -0.5267
(0.197) (0.011) (0.102) (0.122) (0.031) (0.545) (0.064) (0.351)
∆SPt-1 -0.0867 0.3158* 0.1151** 0.1810 0.0351 0.3218* 0.0748* 0.1379
((0.069) (0.125) (0.015) (0.112) (0.025) (0.117) (0.016) (0.108)
∆SPt-1 0.0071 -0.1056 0.0320 -0.0346 0.0817* -0.1341 0.0905** -0.1522
(0.063) (0.081) (0.022) (0.023) (0.037) (0.115) (0.005) (0.123)
Constant 0.0538* 0.01645 0.0077 0.0521* 0.0037 0.0105 0.0073** 0.0518*
(0.012) (0.014) (0.006) (0.043) (0.003) (0.010) (0.031) (0.016)
R2-bar 0.0788 0.0859 0.3136 0.0349 0.5992 0.1427 0.5788 0.1056

30
 Slov Rep Turkey
∆GDPt-1 -0.1062 0.3097* 0.3837* 0.5811
(0.103) (0.151) (0.116) (0.414)
∆GDPt-2 0.1922** -0.5021 0.2508* -0.1359
(0.107) (0.451) (0.102) (0.122)
∆SPt-1 0.1976** 0.5518* 0.1431* 0.2740*
((0.089) (0.115) (0.005) (0.121)
∆SPt-1 0.0311 -0.0696 -0.0041 -0.2316
(0.023) (0.041) (0.010) (0.163)
Constant 0.0116 -0.0014 0.0128 0.0381
(0.010) (0.014) (0.013) (0.023)
R2-bar 0.1518 0.2943 0.6066 0.1289
Note: *, ** denote statistical significance at the 5 and 1% levels, respectively; R 2-bar is the adjusted R-square.
Table 4. Panel Unit Root and Cointegration Results

Panel A: Unit Root Test Results

Ln(GDP) Test Hypothesis Statistic Conclusion
With individual intercept 1.14 Do not reject unit root null
With individual intercept and trend 0.06 Do not reject unit root null

Ln(SP)
With individual intercept 0.75 Do not reject unit root null
With individual intercept and trend 1.96 Do not reject unit root null

Ln(GFCF)
With individual intercept -2.41 Do not reject unit root null
With individual intercept and trend -3.67 Do not reject unit root null

IR
With individual intercept -0.41 Do not reject unit root null
With individual intercept and trend 0.80 Do not reject unit root null

Panel B: Multivariate Cointegration Test Results

Test Hypothesis Panel Statistics
__________________________________________
VR ρ(rho) PP ADF
Individual intercept 19.296 -25.534‡ -23.463‡ -2.999†
Individual intercept and individual trend 14.818 -23.085‡ -24.987‡ -1.660†
No trend or intercept 20.822 -25.566‡ -21.344‡ -3.919‡

Notes: VR, non-parametric variance ratio statistic; rho, non-parametric test statistic analogous to the Phillips
and Perron (PP) rho statistic; PP, non-parametric statistic analogous to the PP t statistic; ADF, parametric
statistic analogous to the augmented Dickey-Fuller statistic; all statistics are distributed as standard normal;
rejection of the null of no cointegration is one-sided and involves: VR, large positive values imply cointegration
(at 5% significance, reject null of no cointegration if V > 1.645); the other three, large negative values imply
cointegration (at 5% significance, reject null of no cointegration if statistic < −1.645); ‡ null of no cointegration
is rejected at the 1% level; † null of no cointegration is rejected at the 5% level.

31
Table 5. Panel Models Results
Panel A: Dependent variable; GDP growth

Variable I II III IV V VI

Constant 0.0603 0.0618 0.0089 -0.0461 0.1367 0.1325

(0.073) (0.061) (0.007) (0.038) (0.156) (0.132)

∆SPit -0.0341 -0.0385*** -0.1622** -0.1660** -0.1726** -0.1765**

(0.022) (0.022) (0.013) (0.018) (0.012) (0.018)

∆SPit-1 0.0052 0.0046 0.0026 0.0031 0.0004 0.0044

(0.004) (0.003) (0.003) (0.003) (0.002) (0.031)

gdp growtht-1 ------- -0.0150 -0.0175 -0.0176 -0.0183 -0.0182

(0.014) (0.015) (0.017) (0.015) (0.019)

gfcf growtht ------- ------- 0.3345** 0.3355** 0.3262** 0.3252**

(0.012) (0.01) (0.060) (0.010)

gfcf growtht-1 ------- ------- 0.0063 0.0065 0.0062 0.0062

(0.050) (0.006) (0.005) (0.050)

∆IRit ------- ------- -------- -0.0231 0.2472 0.2403

(0.020) (0.210) (0.197)

∆IRit-1 ------- -------- -------- 0.0253 -0.2546 -0.2558

(0.026) (0.230) (0.212)

gdpit•∆IRit ------- -------- -------- -------- -0.3244* --------

(0.081)

gfcfit•∆IRit ------- -------- -------- -------- -------- -0.3271*

(0.079)

inflationt-1 ------- -------- -------- -------- -------- -0.0125

(1.701)

R2 0.0159 0.0153 0.4211 0.4257 0.4337 0.4387

F-stat 4.133 5.6653 43.492*** 39.558*** 38.497*** 36.566***
32
 (0.330) (0.407) (0.000) (0.000) (0.000) (0.000)
Cross-section χ2 13.145 13.407 12.880 12.906 12.200 12.199
(0.437) (0.410) (0.459) (0.459) (0.515) (0.515)

Panel B: Dependent variable: GFCF growth

Constant 0.1573 0.0808 0.0819 0.0711 0.3567 0.1655

(0.113) (0.061) (0.100) (0.080) (0.556) (0.232)

∆SPit 0.3941** 0.4425** 0.4422** 0.4420** 0.4426** 0.4307**

(0.041) (0.033) (0.033) (0.031) (0.032) (0.033)

∆SPit-1 -0.0016 -0.0081 -0.0009 -0.0011 0.0009 -0.0031

(0.001) (0.008) (0.003) (0.003) (0.03) (0.023)
Table 5. Panel Models Results (concl’d)

Panel B: Dependent variable: GFCF growth

Variable I II III IV V VI

gdp growtht ------- 1.2543** 1.2565** 1.2456** 1.2245** 1.2234**

(0.045) (0.045) (0.046) (0.044) (0.042)

gdp growtht-1 ------- 0.0020 0.0225 0.0226 0.0233 0.0211

(0.019) (0.020) (0.019) (0.020) (0.019)

gfcf growtht-1 ------- ------- -0.0163 -0.0165 -0.0122 -0.0152

(0.020) (0.021) (0.011) (0.010)

∆IRit ------- ------- -------- -0.0282 1.0588* 0.3403

(0.020) (0.410) (0.197)

∆IRit-1 ------- -------- -------- 0.0733 0.0246 0.0058

(0.066) (0.030) (0.022)

gdpit•∆IRit ------- -------- -------- -------- -0.4500* --------

(0.161)

gfcfit•∆IRit ------- -------- -------- -------- ------- -0.2091*

(0.047)

inflationt-1 ------- -------- -------- -------- -------- -0.2435**

(1.801)

R2 0.0989 0.4630 0.4631 0.4677 0.4767 0.4677

F-stat 6.1671*** 53.889*** 50.712*** 45.778*** 45.077*** 44.056***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Cross-section χ2 12.245 11.677 11.864 11.860 10.950 12.269
(0.507) (0.554) (0.539) (0.539) (0.615) (0.505)

Notes: I, II, III, IV, V, and VI are alternative panel specifications; *, **, *** denote statistical significance at the 5, 10 and
1% levels, respectively; the cross-section χ2 value tests for the appropriateness of the random effects model.

33
Table 6. Robustness Tests Results

Panel A: Panel Models (dependent variable, GDP growth); continent dummies

Variable (dummy) I II III IV V VI

Americas 0.2489 1.1366 1.1566 -0.3492 -0.2767 0.2369

(0.197) (0.988) (0.897) (0.451) (0.332) (0.387)

Europe -1.5520 -1.5561 -0.8922 -0.0882 -0.1357 -0.5134

(1.661) (1.667) (1.108) (0.156) (0.667) (0.776)

Asia 3.8789* 1.1105 1.1011 1.1022 1.0867 1.0967

(2.210) (1.129) (1.187) (1.208) (1.110) (1.201)

Africa -0.4233 -0.4256 -0.6434 -0.6407 -0.6780 -0.8456

(1.321) (1.132) (1.667) (1.110) (1.112) (1.221)

Panel B: Fixed-effects model results: dependent variable GDP growth

Constant 0.0183 0.0188 0.0040 -0.0401 -0.0107 0.1065

(0.083) (0.019) (0.005) (0.039) (0.116) (0.152)

∆SPit -0.0401 -0.0405*** -0.1712** -0.1710** -0.1711** -0.1741**

(0.021) (0.022) (0.018) (0.018) (0.018) (0.018)

∆SPit-1 0.0032 0.0026 0.0009 0.0081 0.0010 -0.0004

(0.002) (0.002) (0.003) (0.003) (0.002) (0.003)

gdp growtht-1 ------- -0.0162 -0.0180 -0.0186 -0.0185 -0.0192

(0.015) (0.016) (0.017) (0.015) (0.018)

gfcf growtht ------- ------- 0.3317** 0.3317** 0.3312** 0.3234**

(0.012) (0.013) (0.012) (0.011)

gfcf growtht-1 ------- ------- 0.0069 0.0069 0.0068 0.0072

(0.005) (0.006) (0.005) (0.051)

∆IRit ------- ------- -------- -0.0007 -0.0187 0.0083

(0.003) (0.041) (0.017)

34
∆IRit-1 ------- -------- -------- -0.0022 -0.0016 0.0018
(0.029) (0.002) (0.022)

gdpit•∆IRit ------- -------- -------- -------- -0.0055 -------

(0.014)

gfcfit•∆IRit ------- -------- -------- -------- -------- -0.2718*

(0.076)

R2 0.0155 0.0156 0.4262 0.4267 0.4267 0.4337

F-stat 1.0653 1.0153 41.962*** 37.698*** 35.887*** 36.976***
(0.380) (0.437) (0.000) (0.000) (0.000) (0.000)

Notes: see Table 5.

Figure 1. Plots of Stock Market Indexes (SP) and GDP, 1995:I – 2014:III
Argentina Brazil
14 16

13 14

12
12
11
10
10
8
9
6
8
4
7

6 SP 2 SP
GDP GDP
5 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Chile Czech Republic

14 14

12 12

10 10

8 8

6 6

4 4
SP SP
GDP GDP
2 2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Estonia Hungary
14
11

10 12

9
10
8
8
7

6 6

5
4
4
2
3 SP SP
GDP GDP
2 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Iceland India
10 16

14
9

12
8

10
7
8

6 SP
GDP 6

5
4
SP
GDP
4 2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Indonesia Mexico
16 16

14 14

12
12
10
10
8
8
6
6
4

4 2
SP SP
GDP GDP
2 0
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

35
Poland S Africa
14 14

12 12

10 10

8 8

6 6

4 4
SP SP
GDP GDP
2 2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Slovak Rep Turkey

12 16

11 14

10 12

9 10

8 8

7 6

6 4

5 2

4 SP 0 SP
GDP GDP
3 -2
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Figure 2. Impulse Responses: Impact of the stock market (SP) on economic growth (GDP)

Argentina Brazil Chile

.020 .020
.016

.015 .015 .012

.010 .010 .008

.005 .005 .004

.000 .000 .000

-.005 -.005 -.004

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

CzRep Estonia Hungary

.008
.020 .008

.006
.015 .006

.004 .010 .004

.002 .005 .002

.000 .000 .000

-.002 -.005 -.002

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Iceland India Indonisia

.04 .020 .020

.03
.015 .015

.02
.010 .010

.01

.005 .005
.00

.000 .000
-.01

-.02 -.005 -.005

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Mexico Poland S. Africa

.010 .012 .006

.010
.008 .005

.008
.004
.006
.006
.003
.004 .004
.002
.002
.002
.001
.000
.000
-.002 .000

-.002 -.004 -.001

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Slovak Rep Turkey

36
.020 .025

.020
.015

.015
.010

.010

.005
.005

.000
.000

-.005 -.005
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Figure 3. Impulse Responses: Impact of economic growth (GDP) on the stock market (SP)

Argentina Brazil Chile

.24 .08

.20 .12
.06
.16
.08 .04
.12

.08 .02
.04
.04
.00
.00 .00
-.02
-.04
-.04
-.08 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

CzRep Estonia Hungary

.12 .20

.10 .12

.15
.08
.08
.06
.10
.04
.04
.02 .05

.00 .00
.00
-.02
-.04
-.04 -.05
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Iceland India Indonisia

.20 .16

.12
.15 .12
.08

.10 .08
.04

.05 .04 .00

-.04
.00 .00

-.08
-.05 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Mexico Poland S. Africa

.10
.16
.12
.08
.10
.12
.08 .06

.06 .08 .04

.04
.02
.04
.02
.00
.00
.00
-.02
-.02

-.04 -.04 -.04

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Slovak Rep Turkey

37
.12 .25

.10 .20

.08 .15

.06 .10

.04 .05

.02 .00

.00 -.05

-.02 -.10
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Figure 4. Impulse Responses: Impact of the stock market (SP) on gross fixed capital formation (GFCF)

Argentina Brazil Chile

.08
.05 .06

.04 .05
.06

.03 .04
.04
.02 .03

.02 .01 .02

.00 .01
.00
-.01 .00

-.02 -.02 -.01

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

CzRep Estonia Hungary

.04 .08 .020

.03 .06 .016

.02 .04 .012

.01 .02 .008

.00 .00 .004

-.01 -.02 .000

-.02 -.04 -.004

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Iceland India Indonesia

.12 .05 .08

.04
.06
.08
.03
.04
.04
.02
.02
.01
.00
.00
.00
-.04
-.02
-.01

-.08 -.02 -.04

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Mexico Poland S. Africa

38
 .028 .025
.05
.024 .020
.04
.020
.015
.03 .016
.010
.02 .012
.005
.008
.01
.000
.004
.00 -.005
.000

-.01 -.004 -.010

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Slovak Rep Turkey

.08
.06

.06 .05

.04
.04

.03
.02
.02
.00
.01

-.02
.00

-.04 -.01
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Figure 5. Impulse Responses: Impact of gross fixed capital formation (GFCF) on the stock market (SP)

Argentina Brazil Chile

.24 .08

.20 .12
.06
.16
.08
.04
.12
.04
.08 .02

.00
.04
.00
.00 -.04
-.02
-.04
-.08
-.08 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

CzRep Estonia Hungary

.20 .16
.12

.10 .15
.12
.08
.10
.06 .08
.05
.04
.04
.02 .00

.00
.00
-.05
-.02

-.04 -.10 -.04

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Iceland India Indonesia

.12 .16

.12
.08 .12
.08

.04 .08
.04

.00 .04 .00

-.04
-.04 .00

-.08
-.08 -.04
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Mexico Poland S. Africa

39
.12 .16 .12

.10 .10
.12
.08 .08

.06 .06
.08

.04 .04

.02 .04
.02

.00 .00
.00
-.02 -.02

-.04 -.04 -.04

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Slovak Rep Turkey

.12 .20

.10
.15
.08
.10
.06

.04 .05

.02
.00
.00
-.05
-.02

-.04 -.10
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

Appendix

Emerging market Representative index

Argentina MERV Buenos Ayres
Brazil Bovespa
Czech Republic PX Index
Hungary Budapest (BUX)
Mexico IPC (Bolsa)
Turkey Istanbul SE National 100
Chile Chile Selective (ISPA)
Iceland ICEX (Iceland Stock Exchange)
India India BSE (100) National
Indonesia IDX Composite
Poland Warsaw General
Slovak Republic Bratislava Stock Exchange
South Africa FTSE/JSE All Share
Turkey Borsa Istanbul

40