finance article No.

5044

STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH EVIDENCE FROM UNDERDEVELOPED NATION Nepal
>Proposal Writing for: > STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH: EVIDENCE FROM UNDERDEVELOPED NATION (Nepal) > > By Jyoti Koirala ([email protected]) > > > A Research Proposal Submitted to: Faculty Members Business or Economics Departmen >

August, 2009 > > > Chapter 1: Introduction

> 1.1. General Background > Stock market development has an important role to play in economic development. Shahbaz and his friends (2008) argue that stock market development is an important wheel for economic growth as there is a long-run relationship between stock market development and economic growth. Stock market development has the direct impact in corporate finance and economic development. > Gerald (2006) states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment by firms. It ensures that these funds are allocated to the most productive use and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. A growing body of literature has affirmed the importance of financial system to economic growth. > Financial markets, especially stock markets, have grown considerably in developed and developing countries over the last two decades. Claessens, et al (2004) states that several factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic growth. General economic and specific capital markets reforms, including privatization of state-owned enterprises, financial liberalization, and an improved institutional framework for investors, have further encouraged capital markets development. > Similarly Mishkin (2001) states that a well-developed financial system promotes investment by identifying and financing lucrative business opportunities, mobilizing savings, allocating resources efficiently, helping diversify risks and facilitating the exchange of goods and services > From the view point of Sharpe, et al (1999), stock market is a mechanism through which the transaction of financial assets with life span of greater than one year takes place. Financial assets may take different forms ranging from the long-term government bonds to ordinary shares of various companies. Stock

market is a very important constituent of capital market where the shares of various firms are traded Trading of the shares may take place in two different forms of stock market. When the issuing firm sells its shares to the investors, the transaction is said to have taken place in the primary market but when already issued shares of firms are traded among investors the transaction is said to have taken place in the secondary market. > Stock markets are very important because they play a significant role in the economy by channeling investment where it is needed and can be put to best (Liberman and Fergusson, 1998). The stock market is working as the channel through which the public savings are channelized to industrial and business enterprises. Mobilization of such resources for investment is certainly a necessary condition for economic take off, but quality of their allocation to various investment projects is an important factor for growth. This is precisely what an efficient stock market does to the economy (Berthelemy and Varoudakis, 1996). > Earlier research emphasized on the role of the banking sector in the economic growth of nation. In the past decade, the world stock markets surged, and emerging markets accounted for a large amount of this boom (DemirgucKunt and Levine (1996a). ?Recent research has begun to focus on the linkages between the stock markets and economic development. New theoretical work shows how stock market development might boost long-run economic growth and new empirical evidence supports this view. Demirguc-Kunt and Levine (1996a), Singh (1997), and Levine and Zervos (1998) find that stock market development is playing an important role in predicting future economic growth. > In underdeveloped like Nepal the development and growth of stock markets have been widespread in recent times. Despite the size and illiquid nature of stock market, its continued existence and development could have important implications for economic activity. For instance, Pardy (1992) has noted that even in less developed countries capital markets are able to mobilize domestic savings and able to allocate funds more efficiently. Thus stock markets can play a role in inducing economic growth in less developed country like Nepal by channeling investment where it needed from public.? Mobilization of such resources to various sectors certainly helps in economic development and growth. Stock market development has assumed a developmental role in global economics and finance because of their impact they have exerted in corporate finance and economic activity. The role of financial system is considered to be the key to economic growth (Neupane, et. al. 2006).

> Paudel (2005) states that stock markets, due to their liquidity, enable firms to acquire much needed capital quickly, hence facilitating capital allocation, investment and growth. Stock market activity is thus rapidly playing an important role in helping to determine the level of economic activities in most economies. > Tuladhar (1996) states that financial markets are catalyst in the development of economy. The study further added that developed economies have highly sophisticated financial institutions. Over the past decade, many developing economies have established capital markets as they moved towards more liberal economic policies. These emerging markets have shown extraordinary growth with very high volatility, which have attracted many investors into these markets. > This study will attempt to dig out the empirical evidence in the context of underdeveloped nations regarding the role of stock market development on economic growth. 1.2. Statement of the Problem: > In the last two decades, the link between financial intermediation and economic growth is a subject of high interest among academics, policy makers and economists around the world. There have been attempts to empirically assess the role of stock market and economic growth. The link between stock market and growth has varied in methods and results. There exists two controversies in the predictions. > Adjasi and Biekpe (2005) found a significant positive impact of stock market development on economic growth in countries classified as upper middleincome economies. In the same way, Chen et al (2004) elaborated that the nexus between stock returns and output growth and the rate of stock returns is a leading indicator of output growth Arestic et al . (2001) using time-series on five industrialized countries also indicate that stock markets play a role in growth. Various studies such as Spears, (1991); Levine and Zervos, (1998); Atje and Jovanovic, (1993); Comincioli, (1996); Levine and Zervos, (1998); Filer et al, (1999); Tuncer and Alovsat, (2001). Levine and Zervos (1995) and, DemirgucKunt (1994) has supported the view .stock markets promote economic growth..With well-functional financial sector or banking sector, stock markets

can give a big boost to economic development (Rousseau & Wachtel, 2000; Beck & Levine, 2003). Bahadur and Neupane (2006) concluded that stock markets fluctuations predicted the future growth of an economy and causality is found in real variables. > There are also alternate views about the role stock markets play in economic growth. Apart from the view that stock markets may be having no real effect on growth, there are theoretical constructs that show that stock market development may actually hurt economic growth. For instance, Stiglitz (1985, 1994), Shleifer and Vishny (1986), Bencivenga and Smith (1991) and Bhide (1993) note that stock markets can actually harm economic growth. They argue that due to their liquidity, stock markets may hurt growth since savings rates may reduce due to externalities in capital accumulation. Diffuse ownership may also negatively affect corporate governance and invariably the performance of listed firms, thus impeding the growth of stock markets. > Despite of alternative views empirical works continue to show largely some degree of positive relationship between stock markets and growth. These studies largely based on developed countries only. Only few studies have been conducted in context of Nepalese stock market, and those conducted studies do not show clear conclusion regarding its impact on economy. Yadhav (2002) finds that firms with higher investment have higher saving and higher capital formation. Though his study may be significant in other cases it is of less significance here. Similarly Wagle (2002) also carried out the study on trends of saving, investment, and capital formation in Nepal, but his study fails to provide any specific link between saving, investment and capital formation with stock market development. Similarly Sindhurakar (2004) has carried out the study on relationship between the stock market and economic growth without analyzing the econometric models. > The study specifically deals with the following issues: 1. What is the relationship between the Gross Domestic Product (GDP) and government investment, government expenses, foreign aid, savings, and foreign direct investment 2. Is there any relationship between the market capitalization and Gross Domestic Product (GDP)? 3. What is the impact of concentration ratio on economic growth of a nation?

4. What is the significance of liquidity on economic growth? What is its impact in capital market? 5. Is there any co-integration between the stock development index and economic growth? 6. Is there any Granger causality between the stock development and economic growth? 7. Is the Levine and Zerovos model valid in underdeveloped nation like Nepal? 8. Can the small group of investors manipulate a Nepalese capital market easily? 9. How can the government able to develop the stock market in coming days?

> One group of study argues that stock market does not help in economic development of a nation while the other group argues that it helps in economic development. However, empirical investigations of the link between financial development in general and stock markets and growth in particular have been relatively limited. Various empirical researches have suggested a possible connection between stock market development and economic growth, but are far from definitive. > 1.3. Objective of the Study > The main objective of this study is to examine the impact of stock market development in the economic development and growth of the nation in context to Nepal. The specific objectives of the study are as follows. > 1. To conduct the empirical analysis of stock market by investigating the link between stock markets and economic growth. > 2. To further analyze the link based on set of different variables of economic indicators and stock market indicators.

> 3. To examine the importance of liquidity for the economic growth. > 4. To analyze the impact of firm concentration ratio on economic growth. > 5. To examine the validity of model of Levine and Zervo's study on stock market in developing nation like Nepal. > 6. To determine and analyze the co-integration and causality between the stock market development index and economic growth. > > > Chapter: 2 Review of Literature > 2.1 Review of Empirical Works > This section concerns with review of important empirical works, concerning stock market development and economic growth starting from 1873 to 2008. Some important studies and their finding are presented in tabular form in chorological order. The review of literature is undertaken in three sections. The first section focuses on the review of empirical works carried out before 1990s with their major findings. Similarly, the second section deals with the review of studies carried out during 1990s and finally third section deal with the review of studies during 2000. > 2.1.1 Review of Empirical Works before 1990s >

During nineteenth and twentieth century, Bagehot (1873) and Schumpeter (1912) had focused on the constructive assistance of financial sector to economic growth. In the study the direction of causality between the higher growth in financial sector and country's economic growth rate was not clear (Robinson, 1952 and Locus, 1988). In the wake of a large body of empirical evidence, considerable studies have made on modeling and understanding the strong positive linkages between real and financial development. Much of this research has followed the functional approach in the analysis of such linkages.

> > > Table: 2.1 Review of Empirical Works from 1873 to 1986 > Study Area Major Findings Bagehot (1873) A description of money market with currency monopoly. Constructive assistance of financial sector to economic growth. Schumpeter (1912) The theory of economic development. Technological innovation is the force underlying long-run economic growth. Robinson (1952) > The Generalization of the General Theory, in The Rate of Interest and Other Essays.

> There is a two-way causal relationship between financial development and economic performance. Goldsmith (1969) Association between levels of financial development with economic growth. A significant association between the level of financial development and economic growth. > The finance-led growth hypothesis postulates the supply-leading relationship between financial and economic developments. It is argued that the existence of financial sector and financial intermediations in channeling the limited resources from surplus units to deficit units would provide efficient allocation resources by leading the other economic sectors in their growth process. Indeed, a number of studies argued that the development of financial sector has significantly promoted economic development (Schumpeter, 1912). The study argued that the technological innovation is the force underlying longrun economic growth. > Robinson (1952), on the other hand, concluded that the economic growth creates a demand for various types of financial services to which the financial system responds. Goldsmith (1969) reported a significant association between the level of financial development (defined as financial intermediary assets divided by GDP) and economic growth. The study however recognized that there is no possibility of establishing the confidence for the direction of the causal mechanisms. > The earlier studies on international stock market linkages focused on the identification of short-term benefits of international portfolio diversification. The study of Levy and Sarnat (1970) and Solnik (1974), examined the short-term correlations of returns across national markets and pointed out the existence of substantial markets have high possibilities to diversify the risk internationally. > McKinnon? (1973) provided the evidences that liberalization of financial markets allows financial deepening which reflects an increasing use of financial

intermediation by savers and investors and the monetization of the economy, which allows efficient flow of resources among people, and institutions over time. This encourages savings and reduces constraint on capital accumulation and improves in allocating efficiency of investment by transferring capital from less productive to more productive sectors. > Another group of studies concentrated on examining financial links among stock markets by using either bivariate or multivariate co-integration methodology. Taylor and Tonks (1989) were the first to apply bivariate cointegration on the UK and U.S. markets to test the importance of the abolition of foreign exchange controls in 1979. Furthermore, the empirical evidence was not conclusive, while a strong empirical causal relationship among the banking system, stock market development and economic performance was hardly established. Financial development is considered as a means to economic growth through various channels. An important role of financial intermediaries is to provide liquidity to individual investors (Diamond and Dybvig 1983). Similarly study of Stiglitz and Weiss, (1981); and Cho, (1986) concluded that the returns does not increase as the interest rate to borrowers rises. > > > > > Table: 2.2 Review of Empirical Works from 1881 to 1986 > Study Area Major Findings Shiller (1981) >

Do stock prices move too much to Be Justified by Subsequent Changes in Dividends? Price movements cannot be simply justified by changes in fundamentals. Stiglitz and Weiss (1981) Credit rationing in markets with imperfect information Due to stagnant bank returns, increase in interest rate does not increase its return. Diamond and Dybvig (1983) A simple example, Federal Reserve Bank of Richmond. An important role of intermediaries is to provide liquidity to individual investors. Lucas (1988) > On the mechanics of economic development. Not clear findings about the causality between financial sector and economic growth. Taylor and Tonks (1989) > The internationalization of stock markets and the abolition of U.K. exchange control There is multivariate co-integration on UK and US market. Romer (1986) Increasing returns and long run growth > Increase in productivity will cause economic growth. Cho (1986)

Inefficiencies from financial liberalization in the absence of well-functioning equity markets. Returns do not increase as interest rate rises. > At the theoretical level, the study of stock markets and growth gave new impetus with analyses of the design of optimal financial contracts under asymmetric information in dynamic general equilibrium models. The study of Bernanke and Gertler, 1989 concluded that the evolution of the financial system led to financial contract which emerged to solve the problems of moral hazard. The study concluded that when the firms are in need of external finance face a cost minimization problem, which they must solve by issuing different forms of financial contracts under different circumstances. > 2.1.2 Review of Empirical Works during 1990s > Stock exchanges are expected to increase the amount of savings channeled to corporate sector. Some evidence can be found in the work of Greenwood and Jovanovich (1990). Furthermore, the study concluded that the stock markets play an important role in allocation of capital to corporate sector that in turn stimulates real economic activity. Many countries are facing financial constraints particularly developing countries, where bank loans are restricted to some favorable groups of companies and personage investors. This limitation can also reflect constraints in credit markets (Mirakhor and Villanueva, 1990). > Table: 2.3 Review of empirical work from 1990 to 1991 > Study Area Major Findings Mirakhor and Villanueva (1990)

Market integration and investment barriers in emerging equity markets. There are high constraints in credit markets. Greenwood and Jovanovich (1990) > Financial development, growth, and the distribution of income. Financial markets and financial institutions can affect capital accumulation. Vishny (1990) > The stock market and investment. Stock market on an aggregate level does not predict the future investment. Levine (1991) > Stock markets, growth, and tax policy. Strong positive relationship between stock market liquidity, productivity improvements and capital accumulations. Bencivenga and Smith (1991) > Financial intermediation and endogenous growth. Financial agents can affect savings decisions by reducing liquidity costs. > The ability of financial intermediaries to offer profitable investments enhances savers' confidence and attracts additional savings. The efficient operation of financial intermediaries leads to output growth and generates additional demand for deposits and financial services (Greenwood and Jovanovic, 1990). Financial institutions can affect agents' savings decisions by reducing liquidity costs and offering greater opportunities for diversifying risks (Bencivenga and Smith, 1991). Portfolio diversification, through the stock market, may have an additional growth effect by encouraging specialization of production (Saint-Paul, 1992).

> In addition, some studies concluded that stock markets could improve corporate governance by alleviating the principal-agent problem between the owners and managers (Jensen and Murphy, 1990). By contrast, other studies pointed out that stock market development could have negative effects by facilitating hostile counter-productive takeovers (Vishny, 1990). Moreover, some argue that takeover threats could hassle managers that discourage long-term investment, and therefore lead to inefficient allocation of resources (Singh and Weiss, 1998). Furthermore, some assert that stock markets, by providing profit incentives, are more effective than banks in information acquisition and dissemination and therefore could enhance quality of investment and thus stimulate growth (Holmstrom and Tirole, 1994). On the contrary, some others believe that banks are superior to stock markets in that they could monitor firms' investment and management at a lower cost. They contend that in reality, due to dispersed stock ownership, individual investors are relatively small and they neither have the ability nor the incentives to acquire the costly yet necessary information for achieving efficient resource allocation (Bhide, 1993; Singh, 1993). > Contrary to traditional view, there are evidences that support the hypothesis that there exist long-run correlation between stock market development and economic growth. But in literature the testing of this hypothesis is rare for developing countries. However, Pardy (1992) in his seminal work has argued that in less developed countries capital markets are able to mobilize domestic savings and allocate funds more efficiently. Spears (1991) reported that in the early stages of development, financial intermediation induced economic growth. Demirguc-Kunt (1994) has supported the view that stock markets promote economic growth. > A number of subsequent studies adopted the growth regression framework in which the average growth rate in per capita output across countries is regressed on a set of variables controlling for initial conditions and country characteristics as well as measures of financial market development (King and Levine, 1993a). The study further analyzes the relationship between financial development and real GDP per capita growth, the rate of physical capital accumulation, and increases in efficiency over the period from 1960-89. The study measured the financial development by using the financial depth ratio (ratio of liquid liabilities to GDP), the level of banking, the ratio of credit issued to non-financial private firms to total credit and the ratio of credit issued to private firms to GDP. The study revealed that higher levels of financial development are positively associated with faster rates of economic growth and that the level of financial

development is a good indicator of future growth prospects. > Robert Barro (1990) reported that in the case of US, stock market variables and stock returns, can largely explain the subsequent aggregate investments. On the contrary, Morck et al (1990) suggested that in the US, the stock market on an aggregate level is not much of a predictor of future investment. Meanwhile, a study by Galeotti and Schiantarelli (1994), based on quarterly aggregate data from the non-financial corporate sector in the US, revealed that investment decisions are significantly affected by stock price fluctuations, regardless whether the variation is due to fads or due to changes in fundamentals. On the other hand, firm- level studies typically showed that there is a very limited effect of the stock market on investment (Abel and Blanchard, 1986; Morck, Shleifer, and Vishny, 1990; Blanchard, Rhee, and Summers, 1993). > Table: 2.4 Review of Empirical Works from 1992 to 1993 > Study Area Major Findings Saint-Paul (1992) Financial markets and economic development. Stock markets have additional growth effect. Pardy (1992) Institutional reform in emerging securities markets. > In less develops countries the capial maket are able to mobilize domestic savings. King and Levene (1993)

Finance and growth Rate of physical capital accumulation has increased in efficiency over the period from 1960 to 1989. Atje, and Jovanovic, (1993) Stock market and development Significant correlation between the stock markets and economic growth. Pagano (1993) > Financial market and growth. Financial growth can affect the rate of economic growth by altering productivity growth and the efficiency of capital. Bhide (1993) The hidden cost of stock market liquidity. Highly liquid market may reduce the shareholders incentives to monitor managers. > Atje and Jovanovic (1993) concluded that there is a large effect of stock markets on economic growth but no relationship for bank lending on economic growth. Alternatively, Harris (1997) argued that the Atje and Jovanovic results are not supported by empirical results. Harris analyzed data for forty-nine countries over the period from 1980-91 for the growth in GDP per unit of effective labor, investment as a percent of GDP, the growth of total employed labor and the total value of shares traded on the stock market as a percent of GDP. The study reported that the level of stock market activity has little explanatory power in the sample of developing countries and weak explanatory power for the sample of developed countries. The study of Stiglitz (1994) provided the evidence that when the stock prices is determined by publicly available information then it help investors make better investment decisions. Better investment decisions by investors means better allocation of funds among corporations and, as a result, a higher rate of economic growth. In efficient capital markets prices already reflect all available information, and this reduces the need for expensive and painstaking efforts to obtain additional information.

Table: 2.5 Review of Empirical Work for 1995 AD > Study Area Major Findings Bencivenga, Smith,and Starr (1995) Transactions costs, technological choice and endogenous growth. Theoretical predications on strong connections between stock market liquidity and fast growth. Bencivenga et al. (1995) Transactions costs, technological choice and endogenous growth Enhanced stock market liquidity reduces the disincentives for investing in long duration and higher return projects since investors can easily sell their stake in the project. Longin and Solnik (1995) > Is the correlation in international equity returns constant: 1960-199 0? By applying sophisticated techniques they found evidence of significant linkages between the stock markets around the world. > Hamao et al. (1990), Koch and Koch (1991), Roll (1992), Longin and Solnik (1995), used more sophisticated econometric techniques to measure crosscountry correlations, and found evidence of significant linkages between stock markets around the world. Some other studies focused on the evolution of linkages of emerging capital markets. Studies such as Harvey (1995), but particularly Bekaert and Harvey (1995), examined one period returns and the conditional means and variances of one period returns by examining a one factor asset pricing model. The study concluded that the expected returns in a country are affected by their covariance with country' returns. The study further

concluded that if the market was perfectly integrated then only covariance counted, while if the market was completely segmented then the variance was the relevant measure of market risk. Bekaert and Harvey (1995) used a conditional regime-switching model to account for periods when national markets were segmented from world capital markets and when they became integrated later in the sample. > > Table: 2.6 Review of Empirical Work for 1996 AD > Study Area Major Findings Demetriades and Hussein (1996) Does financial development cause economic growth? There is bi-directionality and reverse causality between financial development and economic development. > Diamond (1996) Financial intermediation as delegated monitoring: A simple example, federal reserve bank of Richmond Financial intermediaries encourage highly productivity firms reducing informational asymmetries and costs. > Levine and Zervos (1996) > Stock market development and long-run growth.

Equity market activity is positively correlated measures of real economic activity. Benchivenga, Smith and Starr (1996) > Equity markets, transaction costs and capital accumulation. Positive role of liquidity provided by stock exchanges on real asset investments. > There are not much empirical research investigating causal relationships between stock exchanges and economic growth. One study worth mentioning here belongs to Levine and Zervos (1996). The study applied regression analysis to the data compiled from 41 countries for the years 1976 through 1993 to see the relationships between financial deepening and economic growth. One of the financial deepening indicators used in the analysis was the level of development of stock exchange measured by a composite index, liquidity and diversification indicators. Economic growth indicator selected, on the other hand, was the real growth rate in per capita GDP. Levine and Zervos reported a very strong positive correlation between stock market development and economic growth. The most interesting aspect of this study was the decrease in the statistical significance of other financial deepening variables after stock market development index was included in regression equation. The study concluded with the proof that stock market development is more influential than other financial deepening indicators on the growth of the economy. > Traditional growth theorists believed that there is no correlation between stock market development and economic growth because of the presence of level effect not the rate effect. Singh (1997) contended that stock markets are not necessary institutions for achieving high levels of economic development. The study focused on the rapid growth of stock markets in the liberalization process in developing countries over the 1980s and 1990s and argued that financial liberalization (making the financial system more fragile) is not likely to enhance long-term growth. Singh and Weis (1999) viewed stock market as a agent that harm economic development due to their susceptibility to market failure, which is often manifest in the volatile nature of stock markets in many developing countries. The traditional assessment model of stock prices and the wealth effect provided hypothetical explanation for stock prices to be proceeded as an indicator of output (Comincioli, 1996). According to wealth effect, however, changes in stock prices cause the variation in the real economy.

> Although empirical tests of the relationship between financial development and economic development are not consistent, the bulk of the evidence supports a relationship between financial development and economic development. Demetriades and Hussein (1996) found the evidence of both bi-directionality and reverse causality by using unit root tests, co-integration tests and vector autoregression tests of causality. The study concluded that financial development causes economic growth, economic growth causes financial system development, and in some cases, the causality is in both directions. As independent variables, the study has used the ratio of bank deposit liabilities to nominal GDP and the ratio of bank claims on the private sector to nominal GDP. The dependent variable is real GDP per capita in local currency terms. Rajan and Zingales (1998) predicted the average annual real growth of value added in an industry in the United Stated over the period from 1980-90. As predictor variables the study used the proportion of investments funded with external financing and the ratio of capital spending to net property, plant, and equipment. Industries were further divided into young and old companies. This process helped them to differentiate industries that were more or less dependent on external financing. The study wanted to test if financially dependent industries perform better in countries that have more developed financial sectors. As measures of financial development in each of forty-one countries. The study used the ratio of domestic credit plus stock market capitalization to GDP, the ratio of domestic credit to the private sector relative to GDP, and an index of accounting transparency. They study revealed that the financial development facilitates economic development by providing cheaper funds to growing industries. > > > Table: 2.7 Review of Empirical Works from 1997 to 1999 AD > Study Area Major Findings

Harris (1997) Stock markets and development Level of stock market activity has little explanatory power in the developing country sample and weak explanatory power for the developed country sample. Singh (1997) and Weis (1999) Financial liberalization, stock markets and economic development. Stock market is a agent that harm economic development due to their susceptibility to market failure. Raguraman and Zingales (1998) Financial dependence and growth. Financial developmet facilitates economic development? by providing cheaper funds to growing industries. Levine and Zervos (1998) Stock markets, banks and economic growth. Strong and statistically significant relationship between the stock and GDP. Luitel and Khan (1999) A quantitative reassessment of the finance-growth nexus. Financial development is very supportive to economic development. > The development of endogenous growth theory in recent years has offered the opportunity to define and explain the link between financial development and economic growth. The study of Pagano (1993) and Levine (1997) concluded that the financial development could affect the rate of economic growth by altering productivity growth and the efficiency of capital. It also affects the accumulation of capital through its impact on the saving rate or by altering the proportion of saving. > Benchivenga et al (1996) emphasized that there is positive role of liquidity provided by stock exchanges on the size of new real asset investments through

common stock financing. Investors are more easily persuaded to invest in common stocks, when there is little doubt on their marketability in stock exchanges. Some contrary opinions do exist regarding the impact of liquidity on the volume of savings, arguing that the desire for a higher level of liquidity works against propensity to save (Benchivenga and Smith, 1991), (Japelli and Pagano 1994), such arguments were not well supported by empirical evidence. The second important contribution of stock exchanges to economic growth is through global risk diversification opportunities. Saint-Paul (1992), Deveraux and Smith (1994) and Obstfeld (1994) argue quite reasonably that opportunities for risk reduction through global diversification make high-risk high-return domestic and international projects viable and consequently, allocate savings between investment opportunities more efficiently. Whether global diversification might reduce the rate of domestic savings (Deveraux & Smith 1994) seemed to be a weak argument, as it is not convincingly evidenced. > Levine and Zervos (1998) analyzed by using stock market liquidity (turnover of shares and value), size (market capitalization), volatility (twelve month rolling standard deviation), integration with world markets (CAPM and APT intercept terms), and bank credit for the private (bank credit to the private sector to GDP) as predictors of economic growth, capital accumulation, improvement in productivity, and savings growth rates for forty-seven countries from 1976-93. The study reveals a positive relationship between stock market and bank development and economic growth, capital accumulation, and productivity growth. The authors conclude that stock markets provide an easy means to trade the ownership of productive assets, which facilitates resource allocation, which, in turn, facilitates capital formation, which leads to faster economic growth.

In the framework of the new growth theory, surprisingly few empirical studies of the relation between stock market and economic growth are available. The one important study mentioned earlier is one by Levine and Zervos (1998) who are among the first to ask whether stock markets are merely burgeoning casinos or a key to economic growth and to examine this issue empirically, finding a positive and significant correlation between stock market development and long run growth. The work of Luintel and Khan (1999), among others, is supportive of this view. > 2.1.3 Review of Literature during 2000 >

Empirical work done in the past two decades mostly focused on the role of financial development in stimulating economic growth, without taking into account of the stock market development. Evolution of stock market has impact on the operation of banking institutions and hence, on economic promotion. This means that stock market is becoming more crucial, especially in a number of emerging markets and their role should not be ignored (Khan and Senhadji, 2000). > Beck et al (2000) analyzed the relationship between financial development and economic growth, total factor productivity growth, physical capital accumulation rates and private savings rates. The study reported that there is a large positive effect of financial intermediaries and total factor productivity growth and economic growth but a lesser effect for long-term economic growth and total factor productivity growth. > Wurgler (2000) analyzed the relationship between financial markets and capital allocation in sixty-five countries from 1963-95. The study revealed that countries with more developed financial markets shift capital to growing industries and away from declining industries. The efficiency of the financial system is inversely related to government ownership in the economy and directly related to information availability for firms and legal protections for minority stockholders. > Table: 2.8 Review of Empirical Work from 2000 to 2004 AD Study Area Major Findings Beck, Levene and Loayza (2000) Finance and sources of growth. There is a large positive effect of financial intermediaries and total factor productivity growth.

Wurgler (2000) Financial market and allocation of capital. The efficiency of financial system is inversely related to information availability for firms and legal protections for minority stockholder. Arestis et al. (2001) Financial development and economic growth. Both stock market and bank may be able to help in economic development. Bell and Rausseau (2001) A case of finance lend industrialization Financial development in India has instrumental role for promoting economic performance. > Mishkin (2001) and Caporale et al (2004) Financing, savings, capital and risk. Financing productive projects mobilize domestic savings, allocate capital and diversify the risk, facilitate exchange of goods and services. > > Tuncer and Alovsat (2001) examined stock market-growth nexus and exhibited positive casual correlation between stock market development and economic activities. Chen et al (2004) elaborated that the nexus between stock returns and output growth and the rate of stock returns is a leading indicator of output growth. The study of Phylaktis and Ravazzolo (2001) measured financial linkages by analyzing the covariance of excess returns on national stock markets of emerging economies. A major advantage of this framework is that by examining the co-movement of future returns aggregated over a long horizon instead of the co-movement of one period expected returns one can detect small but persistent movements in expected returns and more accurately measure the degree of financial integration than one period stock return regression models.

> The study of (Arestis, Demetriades and Luintel, 2001) found that in countries like Germany, stock market volatility has a significant and negative impact on growth. Another point worthy of note is that studies based on a cross-country framework in general have omitted China due to lack of data. Needless to say that given the increasing role of China in the world economy, understanding China is important in its own right. The study used a vector autoregressive model to study the relationship between stock market development measures and economic growth for developed economies, controlling for the banking sector development. The study finds that the stock market and economic growth both may be able to promote growth, with the impact of the banking system being stronger. With well-functional financial sector or banking sector, stock markets can give a big boost to economic development (Rousseau and Wachtel, 2000; Beck and Levine, 2003). > Mishkin (2001) and Caporale et al (2004) provided the evidence that an organized and managed stock market stimulate investment opportunities by recognizing and financing productive projects that lead to economic activity, mobilize domestic savings, allocate capital proficiency, help to diversify risks, and facilitate exchange of goods and services. Undoubtedly, stock markets are expected to increase economic growth by increasing the liquidity of financial assets, make global and domestic risk diversification possible, promote wiser investment decisions, and influence corporate governance, that is, solving institutional problems by increasing shareholders' interest value (Vector, 2005). > Bell and Rousseau (2001) evaluated the relationship between individual macroeconomic indicators and measures of financial development in India and revealed that the financial sector has been instrumental in promoting economic performance. Nourzad (2002) analyzed the effect of financial development on productive efficiency using eight measures of financial development for countries at different stages of economic development. The study analyzed three sets of panels of data: annual data for twenty-nine countries from 1966-90, annual data for eighteen countries from 1970-90, and five year average data for twenty-eight countries from 1970-90. The author finds that productive efficiency is greater in countries that have more developed financial sectors. > Table: 2.9 Review of Empirical Works from 2005 to 2007 AD

> Study Area Major Findings Shrestha (2005) Stock Market and Economic Development. Gross Domestic Product influence stock market. Vinhas de Souza (2005) > Financial liberalization and business cycles: The experience of the new EU member states. Capital market reform programs, government approved new laws are regulatory framework for capital market flourish. Siliver and Duong (2006) Role of stock market for real economic activity: evidence for Europe. Stock market has certain predictive content for real economic growth. Yartey and Adjasi (2007) > Stock market development in Sub-Saharan Africa: Critical issues and challenges African stock market facing challenge of integration and need better technical and institutional development to address the problem of low liquidity. > Efficient stock markets provided guidelines to keep appropriate monetary policy through the issuance and repurchase of government securities in the liquid market, which is an important step towards financial liberalization. Similarly, well-organized and active stock markets could modify the pattern of

demand for money, and would help create liquidity that eventually enhances economic growth (Caporale et al, 2004). Similarly, Siliverstovs and Duong (2006) revealed that the accounting for expectations has represented by the economic sentiment indicator in which stock market has certain predictive content for the real economic activity. > Paudel (2005) acknowledged that stock markets, due to their liquidity, enable firms to attain much needed capital quickly, hence facilitating capital allocation, investment and growth. Adjasi and Biekpe (2005) found a significant positive impact of stock market development on economic growth in countries classified as upper middle-income economies. Bahadur and Neupane (2006) concluded that stock markets fluctuations helps in the prediction of the future growth of an economy. > > 2.1.4 Concluding Remarks > From the above, it may be seen that the effect of capital markets on economic growth has been a controversial subject. Some studies indicated the statistically significant effect of stock market development on economic growth while others did not. Similarly, some reported positive impact of stock liquidity on economic growth while some did not. In order to validate one view or the other in Nepalese context, no study has been so far conducted by using the recent data by considering Deminigue-Kunt and Levene's stock market development index. This study therefore tests the above hypothesis concerning stock market development and economic growth in undeveloped country, Nepal. > > > Chapter 3: Research Methodology > 3.1 Research Design >

For the analysis of relationship between the stock market development and economic growth descriptive, co-relational and time series research design will be employed. For the purpose of conceptualization and description, the descriptive research design is going to be used. For the analysis purpose the study covers the time period of ten years. This study will be made on a macro level so it consists of all the sectors including commercial banks, manufacturing and processing organization, hotel sectors, trading, insurance, finance companies and, development banks and so on. > 3.2 Nature and Sources of Data > This study will base on both primary and secondary data. Most of the data related to economic growth and stock market development will be collected from annual report and official reports of concerned organization. The required information will? be ?supplemented by Ministry of Finance, Department of Industries, Commerce and Supplies, economic survey published by Nepal Government, quarterly economic bulletin published by Nepal Rastra Bank (NRB), National Planning Commission and Security Board of Nepal (SEBON), World Bank Report will be considered. > A field survey based on questionnaire and interview will also be conducted to collect opinions of different respondents in three groups. The respondents selected for the survey will be stock investors, general student and public who have not invested in shares to obtain the information in respect of economic performance and stock market development. > 3.3 Selection of Enterprises > The study is related to aggregate values so aggregate values of economy that is determinants of macroeconomic indicators and aggregate value of market activities that is determinants of stock market developments are going to be selected. > 3.4 Methods of Analysis

> Analysis is the systematic and careful examination of available facts so that certain conclusions can be drawn from it. The major part of the study is based on the testing of association of stock market and economic growth. > 3.4.1 Econometric Model > This study is heavily based on Levine and Zervos's study on stock market development and long run growth. However, their study is based on crosscountry regression, but this study considers time series analysis and single equation regression applied to the collected data. > Study will determine the casual relation between stock market development and economic growth then determine how they evolve over time and finally seek the relationship between the stock market development and its economic performance. Levine and Zervos (1996) suggested the following equation to evaluate whether there is any relationship between the stock market development and long run economic growth. > GDPt = aX t + bSTOCK t + t ? (1) > Where GDP Growtht is the Gross Domestic Product growth rate and Xt is a set of control variables that is associated with GDP. These variables include government expenditure (EXPN), Public Investment (INV), public development aid (AID), foreign direct investment (FDI). In the same way STOCKt represents stock market development index. It includes market capitalization ratio (Mcap), liquidity ratio (Liquidt) and concentration ratio (Conct). A and B are unknown parameters to be estimated and Mt is an error term. We can consider the following equations in details. > GDPt = a1 Xt + b1 Mcapt + b2 Liquidt + b3 Conct + t (2) >

Government expenditure is selected as control variables because in underdeveloped country, government plays key role in economic growth for driving the different productive activities. Thus it can impact positively as well as negatively on economic growth. Public investment is selected as a control variable because if the public investment policy is directed correctly (for instance towards infrastructures development), it can impact significantly on economic growth, since public investment can target health, education, etc., which all contribute to increase total factor productivity. Public development aid is selected because in developing countries savings is inadequate so development aid is an oxygen pipe' for nation's development. Foreign direct investment is taken because it measures the private investment as domestic investment is very low as compared to it so it is ignored here. > The Liquidity ratio variable represents the turnover ratio measured as the value of total shares traded divided by market capitalization (high turnover then high liquidity). Liquidity allows investors to easily buy and sell securities. As Levine and Zervos (1996) put it, stock markets may affect economic activity through their liquidity since investors are reluctant to relinquish control of their saving for long periods. Market capitalization ratio, which equals the value of listed shares divided by GDP, is taken as the indicator for stock market development. This ratio measures the stock market size, ability to mobilize the capital and helps to diversity the risk. Concentration ratio is the four firm concentration ratios, which is measured by dividing market capitalization of four largest stocks by total market capitalization. If few companies dominate the market, they can manipulate the price formation process. Thus a high concentration ratio is not desirable. Countries with highly concentrated markets have markets that are underdeveloped. So market concentration is hypothesized to be negatively correlated with market size and market liquidity. > 3.4.2 Correlation Analysis > Correlation analysis is necessary in order to find out whether the selected variables in time series have any relation or not. If there is no correlation there would be no causality so this test is necessary. > A mathematical formula for measuring the correlation developed by Pearson is as follows.

> (3) > Where r is a correlation coefficient, Xt and Yt are two variables whose correlation is to be calculated. Correlation is a measure of the relation between two or more variables. The measurement scales range from -1.00 to +1.00. The value of -1.00 represents a perfect negative correlation, while a value of +1.00 represents a perfect positive correlation. A value of 0.00 or close to zero represents a lack of correlation. > 3.4.3 Time Series Analysis of the Data

For the data analysis purpose the following time series analysis is made. They are as follows. > 3.4.3.1 Unit Root Tests: > According to Nelson and Plosser (1982), Chowdhury (1994) there exists unit roots in most macroeconomic time series.? While dealings with time series, it is necessary to analyze whether the series are stationary or not. Since regression of non-stationary series on other non-stationary series leads to what is known is spurious regression causing inconsistency of parameter estimate (Engle and Yoo, 1987). The hypothesis behind is that random shocks in economy have long lasting effects (Engle & Granger, 1987). The most popular of these tests are the Augmented Dickey-Fuller (ADF) test and the Phillips-Perron (PP) tests. ADF test will be considered for this study because ADF tests use a parametric autoregressive structure to capture serial correlation. > 3.4.3.2 Co-integration Test > The finding that many macro time series may contain a unit root has spurred the development of the theory of non-stationary time series analysis. Engle and

Granger (1987) pointed out that a linear combination of two or more nonstationary series may be stationary. If such a stationary linear combination exists, the non-stationary time series are said to be co-integrated. The stationary linear combination is called the co-integrating equation and may be interpreted as a long-run equilibrium relationship among the variables. The purpose of the co-integration test is to determine whether a group of non-stationary series is cointegrated or not. Eviews5 statistical software implements VAR-based cointegration tests using the methodology developed in Johansen (1991, 1995a). > There are two different methods for testing for co-integration, Engle & Granger (1987) and Johansen (1988). Jung and Seldon (1995) state that the Johansen co-integration test is more valid as there is no need of prior knowledge of the co-integration vectors, in cases when they are unknown. As this study does not have the co-integration vectors it is better to use the Johansen (1988) test. The Johansen methodology utilizes Vector Auto Regression (VAR) to test the co-integration. The Johansen (1988) method of testing for the existence of co-integrating relationships has become standard in the econometrics literature because of its superiority over other alternatives. > 3.4.3.3 Granger Causality between Economic Growth and Stock Market Development > Measuring the correlation (similarities in strength and direction between two graphs) between variables such as GDP and STOCK would according to Granger (1969) not be enough to construct a complete understanding about the relationship between two time series. The reason is that some correlations may be spurious and not useful, as there might be a third variable that cannot be accounted for. For example there is a correlation between teacher's salaries in the UK and the consumption of alcohol in the UK. Another example is that ice cream sales are correlated to shark attacks on swimmers (Lethen, 1996). In both examples it would be highly unlikely that one causes the other but that there exists other hidden variables affecting both. There is a correlation but no causal connection. > By using the Granger causality approach with the question if variable X (in a time series), causes variable Y (in another time series), a researcher wants to see how the value of the existing Y can be explained by past values of Y. And then by adding lagged values of X add to explanation of the relationship (Eviews 5.0 statistical software)

> This does in practice imply that if you find a variable that is Granger causing another variable in a certain direction or both, manipulation of one would affect the other.? To reduce spurious results the process of finding Granger causality also involves finding out other relations between the time series and such relations include looking at correlation and co-integration (Sahlin and Sjogren, 2008). So this study is not only looking at the correlation, co-integration and causality but also looking at a further developed relationship between the time series. This is combined to produce an answer to if there is a relationship between the variables. Hence, in this study the word relationship stated by statistical software is used as a generic term for the combined correlation, cointegration and causality time series. For the calculation purpose the following equations have to be estimated. > 3.4.4.4 Other Statistical Tools Considered > For our data presentation and analysis other statistical tools will be. They are mean, median, standard deviation, maximum and minimum, T-test, F-test and Standard Error of Estimate (SEE). > > > Chapter 4: Concluding the research proposal > There are many studies that have examined the relationship between growth and stock markets using either cross country or panel methods. However their empirical approach typically suffers from serious econometric weakness. Traditional growth theorists believed that there is no correlation between stock market development and economic growth. Singh (1997) argues that stock markets are not necessary institutions for achieving high levels of economic development. Some recent studies have stated that stock markets play an important role in allocation of capital to corporate sector that in turn stimulate real economic activity. Studies of Caporale (2004), Vector (2005), Mishkin (2001) and few other studies too state that an organized and managed stock market stimulates economic activities. Most of these studies have reported

positive effects of stock on economic growth. One group of study argues that stock markets do not help in economic development of a nation while the other group argues that it help in economic development. > With this contrast view, this study attempts to find possible connection between stock market development and economic growth with reference to Nepal. The variables selected for the study are Gross Domestic Product (GDP), Government Investment (INV), Government Expenditure (EXPN), Foreign Aid (AID), Foreign Direct Investment (FDI), Market Capitalization Ratio (MCAP), Concentration Ratio (CONC) and Liquidity (LIQDT). > > > Bibliography > Abel, Andrew B. and Blanchard, Olivier J. (March 1986), The Present Value of Profits and Cyclical Movements in Investment. Econometrica , Vol. 54, No. 2, pp. 249-273. > Adjasi, Charles K.D. and Nicholas B. Biekpe (2005), Stock Market Development and Economic Growth: The Case of Selected African Countries.? Working Paper, African Development Bank. > Arestis, Philip; Demetriades, Panicos O; and Luintel, Kul B. (2001), Financial Development and Economics Growth: The Role of Stock Markets. Journal of Money, Credit, and Banking , Vol. 33, No. 1, pp. 16-41. > Atje, Raymond and Jovanovic, Boyan (April 1993), Stock Markets and Development. European Economic Review , Vol. 37 No. 2/3, pp. 632-40. > Bagehot, Walter (1873), A Description of Money Market with Currency Monopoly , Homewood, Lombard Street, 1962 Edition.

> Barro, Robert (1990), The Stock Market and Investment. Review of Financial Studies , Vol.3, No. 1, pp. 115-131. > Bastola, P. (2003), Impact of Stock Market in Development, unpublished Masters Dissertation, Faculty of Management, Tribhuvan University. > Beck, Thorsten, Ross Levine and Norman Loayza (2000), Finance and the Sources of Growth. Journal of Financial Economics , Vol. 58, pp. 261-300. > Beck, T. and R. Levine (2003), Stock Markets, Banks, and Growth: Panel Evidence. Journal of Banking and Finance . > Bekaert, G. and C.R. Harvey (1995), Time-Varying world market integration. Journal of Finance , Vol. 50, pp. 403-444. > Bell C. and P. L. Rousseau (2001), Post-Independence in India: A Case of Finance Lend Industrialization. Journal of Development Economics Vol. 65, pp. 153-175. > Bencivenga, V.R. and Smith B. (1991), Financial Intermediation and Endogenous Growth . Review of Economic Studies , Vol. 58, pp. 195-209. > Bencivenga, V.R.; Smith, B. and Starr, R. M. (1996), "Equity Markets, Transaction Costs, and Capital Accumulation: An Illustration." The World Bank Economic Review , Vol. 10 No. 2, pp. 241-265. > Bernanke, B. and M. Gertler (1989), Agency Costs, Net Worth, and Business Fluctuation. American Economic Review , Vol. 79, pp. 14-31.

> Bhide, Amar (August 1993), "The Hidden Costs of Stock Market Liquidity," Journal of Financial Economics , Vol. 34, No. 2, pp. 31-51. > Blanchard, Olivier, Rhee, Changyong, and Summers, Lawrence (1993), The Stock Market, Profit, and Investment. Quarterly Journal of Economics , Vol. 108, pp. 115-36. > Capora

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e,alternative,alternatives,amount,amp,analyses,analysis,analyze,analyzed,analy zes,analyzing,annual,answer,applied,apply,applying,approach,appropriate,appro ved,argue,argued,argues,arguing,argument,arguments,ask,aspect,assert,asses s,assessment,asset,assets,assistance,associated,association,assumed,asymm etric,asymmetries,attacks,attain,attempt,attempts,attracted,attracts,author,autho rs,autoregression,autoregressive,availability,available,average,b1,b2,b3,bSTOCK,bank ,banking,banks,barriers,became,become,becoming,begun,behind,believe,believ ed,belongs,benefits,better,between,bidirectionality,big,bivariate,body,bonds,boom,boost,borrowers,bulk,bulletin,burge oning,business,buy,calculated,calculation,called,cannot,capacity,capial,capita,ca pital,capitalization,capture,careful,carried,case,cases,casinos,casual,catalyst,ca usal,causality,cause,causes,causing,century,certain,certainly,challenge,challeng es,changes,channel,channeled,channeling,channelized,channels,characteristics ,cheaper,choice,chorological,circumstances,claims,classified,clear,close,cointegrated,co-integrating,co-integration,co-movement,corelational,coefficient,collect,collected,combination,combined,commercial,commo n,companies,compared,compiled,complete,completely,composite,concentrated, concentration,conceptualization,concerned,concerning,concerns,conclude,concl uded,conclusion,conclusions,conclusive,condition,conditional,conditions,conduct ,conducted,confidence,connection,connections,consequently,consider,considera ble,considerably,considered,considering,considers,consistent,consists,constant, constituent,constraint,constraints,construct,constructive,constructs,consumption, contain,contend,contended,content,context,continue,continued,contract,contract s,contrary,contrast,contribute,contribution,control,controlling,controls,controversi al,controversies,convincingly,corporate,corporations,correctly,correlated,correlati on,correlations,cost,costly,costs,could,counterproductive,countries,country,covariance,covers,cream,create,creates,credit,cros s,crosscountry,crucial,currency,cycles,data,days,deal,dealings,deals,decade,decades,d ecisions,declining,decrease,deepening,deficit,define,defined,definitive,degree,de legated,demand,dependent,deposit,deposits,depth,description,descriptive,desig n,desirable,desire,details,detect,determinants,determine,determined,develop,de veloped,developing,development,developmental,developments,developmet,dev elops,deviation,did,different,differentiate,dig,directed,directions,directly,discoura ge,disincentives,dispersed,dissemination,distribution,diversification,diversify,dive rsifying,diversity,divided,dividing,domestic,dominate,drawn,driving,due,duration, during,dynamic,earlier,early,easily,easy,econometric,econometrics,economic,ec onomics,economies,economists,economy,education,effect,effective,effects,effici ency,efficiently,efforts,eight,eighteen,either,elaborated,emerged,emerging,emph asized,empirical,empirically,employed,enable,encourage,encouraged,encourage s,encouraging,endogenous,enhance,enhances,enough,ensures,enterprises,equ als,equation,equations,equilibrium,equipment,equity,error,especially,established

,establishing,estimate,estimated,etc,evaluate,evaluated,eventually,evidence,evi denced,evidences,evolution,evolve,examination,examine,examined,examining,e xample,examples,excess,exchange,exchanges,exerted,exhibited,exist,existence ,existing,exists,expectations,expected,expenditure,expenses,expensive,experie nce,explain,explained,explanation,explanatory,external,externalities,extraordinar y,face,facilitate,facilitates,facilitating,facing,factor,factors,facts,fads,fails,failure,fa r,fast,faster,favorable,federal,few,field,finally,finance,finance-growth,financeled,financial,financially,financing,find,finding,findings,finds,firm,firms,first,five,flourish,flow,fluctuations,focus,focused,focuses,followed,following, follows,force,foreign,form,formation,forms,formula,forty-nine,forty-one,fortyseven,found,four,fragile,framework,friends,functional,fundamentals,funded,funds ,further,future,gave,general,generates,generic,get2jyoti,give,given,global,glosp,g mail,going,goods,governance,government,graphs,greater,group,groups,growing, grown,guidelines,hand,hardly,harm,hassle,having,hazard,health,heavily,help,hel ped,helping,helps,hidden,high,high-return,highrisk,higher,highly,his,horizon,hostile,hotel,household,html,hurt,hypothesis,hypoth esized,hypothetical,identification,identifying,ignored,illiquid,impact,impeding,imp erfect,impetus,implements,implications,imply,importance,important,importantly,i mprove,improved,improvement,improvements,improves,inadequate,include,incl uded,includes,including,income,inconsistency,increase,increased,increases,incr easing,independent,index,indicate,indicated,indicator,indicators,individual,induc ed,inducing,industrial,industrialization,industrialized,industries,industry,inefficient ,influence,influential,information,informational,infrastructures,initial,innovation,ins tance,instead,institutional,institutions,instrumental,insurance,intercept,interest,int eresting,intermediaries,intermediary,intermediation,intermediations,international, internationalization,internationally,interpreted,interview,invariably,inversely,inves t,invested,investigating,investigations,investing,investment,investments,investor s,involves,issuance,issue,issued,issues,issuing,justified,keep,known,lack,lagged ,largest,last,lasting,later,laws,lead,leading,leads,legal,lend,lending,lesser,level,le vels,liabilities,liberal,liberalization,life,like,likely,limitation,limited,linear,link,linkag es,links,liquidity,listed,literature,little,loans,local,long-run,longterm,looking,lucrative,macro,macroeconomic,made,main,major,make,makers,m aket,making,managed,management,managers,manifest,manipulate,manipulatio n,manufacturing,market,marketgrowth,marketability,markets,mathematical,maximum,mean,means,measure,me asured,measurement,measures,measuring,mechanics,mechanism,mechanisms ,median,member,mentioned,mentioning,merely,method,methodology,methods, middleincome,might,minimization,minimum,minority,mobilize,mobilizing,model,modelin g,models,modify,monetary,monetization,money,monitor,monitoring,monopoly,m onth,moral,mostly,moved,movements,multivariate,must,nations,nature,necessar y,need,needed,negative,negatively,neither,new,nexus,nineteenth,nominal,nonfinancial,non-

stationary,note,noted,number,objective,objectives,obtain,offer,offered,offering,off icial,omitted,operate,operation,opinions,opportunities,opportunity,optimal,order,o rganization,organized,output,owners,ownership,painstaking,panel,panels,param eter,parameters,parametric,particular,particularly,past,pattern,people,percent,pe rfectly,perform,performance,period,periods,persistent,personage,persuaded,phy sical,pipe,place,plant,play,playing,plays,plus,point,pointed,policies,policy,popular ,portfolio,positive,positively,possibilities,possibility,possible,postulates,power,pra ctice,precisely,predications,predict,predicted,predicting,prediction,predictions,pr edictive,predictor,predictors,presence,presentation,presented,price,prices,pricin g,primary,principalagent,prior,private,privatization,problem,problems,proceeded,process,processin g,produce,production,productivity,proficiency,profit,profitable,programs,project,pr ojects,promote,promoted,promotes,promoting,promotion,proof,propensity,proper ty,proportion,proposal,prospects,protections,provide,provided,providing,public,p ublicly,published,purpose,quality,quantitative,quarterly,question,questionnaire,q uickly,quite,random,ranging,rapid,rapidly,rare,rationing,ratios,real,reality,reason, reasonably,reassessment,recent,recognized,recognizing,reduce,reduces,reduci ng,reduction,reference,reflect,reflects,reform,reforms,regarding,regardless,regim eswitching,regressed,regulatory,relationship,relationships,relative,relatively,releva nt,relinquish,reluctant,report,reported,reports,represented,represents,repurchas e,required,research,researcher,researches,reserve,resource,resources,respect,r espondents,responds,restricted,result,results,returns,revealed,reveals,reverse,r eview,right,risks,root,roots,said,salaries,sales,same,sample,save,savers,saving, savings,scales,second,secondary,section,sections,sector,sectors,securities,see, seek,seemed,seen,segmented,selected,sell,sells,seminal,sentiment,serial,series ,serious,services,several,shareholders,shares,shark,shift,shocks,shortterm,show,showed,shown,shows,significance,significant,significantly,similarities, simple,simply,single,sixtyfive,small,software,solve,solving,sophisticated,span,specialization,specific,specif ically,spending,spreading,spurious,spurred,stability,stages,stagnant,stake,stand ard,starting,state,stateowned,stated,states,statistical,statistically,statsoft,step,stimulate,stimulates,stim ulating,stock,stockholder,stockholders,stocks,strength,strong,stronger,student,st udies,study,subject,subsequent,substantial,suffers,suggested,superior,superiorit y,supplemented,supplyleading,support,supported,supportive,supports,surged,surplus,surprisingly,surve y,susceptibility,swimmers,system,systematic,tabular,taken,takeover,takeovers,ta kes,target,tax,teacher,technical,techniques,technological,terms,testing,tests,text book,theoretical,theorists,theory,third,threats,three,timeseries,times,tools,total,towards,trade,traded,trading,traditional,transaction,transf erring,transparency,trends,turnover,twelve,twentieth,twenty-eight,twentynine,two,two-

way,types,typically,under,underdeveloped,underlying,understanding,undertaken, undeveloped,units,unknown,unlikely,unpublished,upper,useful,utilizes,valid,valid ate,validity,value,values,variable,variables,variances,variation,varied,various,vec tor,vectors,very,viable,viewed,volatile,volatility,volume,wake,wanted,wants,was, weak,weakness,wealth,well,well-developed,well-functional,well-functioning,wellorganized,wheel,whose,widespread,wiser,word,working,works,world,worth,worth y,year,years,young,zero,t,oxygen [140 other words in this document] AND,Although,An,And,Another,As,At,Be,Both,But,By,Can,Do,Does,FROM,For,F rom,Hence,How,However,If,In,Is,It,Many,Most,Much,No,Not,On,One,Only,Other ,Since,So,Some,The,There,These,They,This,Though,Thus,To,US,We,What,Wh en,Where,Whether,While,With,able,about,above,across,actually,after,against,alr eady,also,among,and,another,are,around,as,away,be,because,been,before,bein g,best,both,but,by,can,do,does,done,each,from,good,has,have,hence,how,howe ver,if,into,its,large,largely,less,low,lower,many,may,more,most,much,of,off,often, only,others,our,should,since,some,such,than,that,their,them,then,there,therefore ,these,they,this,those,through,thus,too,were,what,when,where,whether,which,w hile,who,will,with,without,would,yet,you