Stock Market Liquidity Impact on Economic Development

Abstract

This work analyses the relationship between the stock market liquidity and the country's economic development, which has been object of interest of many researches lately. The stock market liquidity is considered to have a huge impact on a country's economic development. However, all the known studies focused on the economic growth as proxy for the economic development, instead of using a composition of various dimensions to explain the true economic development of a country.Therefore, the main aim of this work is to contribute to this branch of the literature by using the Human Development Index as proxy for the economic development. The stock market liquidity was calculated based on the Amihud's (2002) illiquidity measure, which is one of the most reliable measures of this area.This study was carried out based on a wide and diversified sample with 59 countries.The sample period is comprised between 1990 and 2015, with annual frequency data. Firstly, the correlations between the stock market liquidity and economic development are calculated for each country using the Spearman's non-parametric correlation test. Then, were applied the pooled OLS and fixed and random effects regression models, being the most suitable model then chosen through the F, Breusch-Pagan and Hausman tests. When analysed individually, most of the countries have a positive correlation coefficient between the stock market liquidity and economic development, which is consistent with the statistically significant positive relationship when analysing the global sample. Dividing the original sample by the level of economic development of the countries and by the period before and after the economic crisis of 2008, there are statistically significant changes in the impact of the stock market liquidity on the countries' economic development. Only the developing countries presented a statistically significant negative relationship between the two analysed dimensions, contrary to the initial expectations. Still, this result may be related to the greater difficulties in the transaction of assets, reducing liquidity and slowing down economic growth.