Saturday, 27 March 2010: 11:55
The current financial crisis didn’t leave a place for investors to hide. Upon looking at return performance across any array of regions, countries, and sectors, broad market averages are down approximately 40% on their end of 2006 levels. According to Thomson’s DataStream, at the beginning of October 2007, world equity markets had a market capitalization of more than $51 trillion. What happened over the next 17 months is nothing short of the largest devastation of equity value in history. By the end of February 2009, global equity market capitalization stood at just over $22 trillion, a drop of more than 56 % and a reduction of equity value to about 50% of Global GDP. Moreover, for the first quarter of 2009, the annualized rate of decline in GDP was, for example, 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 9.8% in the Euro area and 21.5% for Mexico.
As expected, the financial sector has been more much more negatively affected over the past 26 months than non-financial sector. The financial sector return index (in USD) fell significantly more (-63.9%) compared to non-financial sector (-38.3%) over the sample period. Moreover, the volatility of the financial sector is nearly 50% higher than nonfinancial sector returns.
A global equity market collapse of this magnitude raises number critical questions. What is the nature of transmission between output and financial sector. To which extent does this transmission mechanism varies between integrated market (i.e. EMU countries) and segmented once (i.e. European non-EMU countries, US, Japan). To which extent does this transmission mechanism varies across sectors.
This paper empirically investigates the effect of a various measures of stock market liquidity, size, volatility, and integration on current and future rate of economic growth, capital accumulation, productivity improvements, and saving rate in 12 EMU countries between years 1990 and 2008. This investigation provides empirical evidence on the major theoretical debates regarding the link between stock markets and long-run economic growth. Moreover, we control for economic, legal, and political factors that may influence growth to gauge the sensitivity of the results to change in the conditioning information set. The introduction of the Euro as a common currency and the impact of the international financial crisis 07-09 are in particularly examined both on national and sectoral level. To control for the endogeneity bias induced by reverse causality running from GDP growth to financial integration, development of national financial markets and other explanatory variables, we use the GMM estimator proposed by Arellano and Bover (1995) and Blundell and Bond method of the dynamic panel framework.
As expected, the financial sector has been more much more negatively affected over the past 26 months than non-financial sector. The financial sector return index (in USD) fell significantly more (-63.9%) compared to non-financial sector (-38.3%) over the sample period. Moreover, the volatility of the financial sector is nearly 50% higher than nonfinancial sector returns.
A global equity market collapse of this magnitude raises number critical questions. What is the nature of transmission between output and financial sector. To which extent does this transmission mechanism varies between integrated market (i.e. EMU countries) and segmented once (i.e. European non-EMU countries, US, Japan). To which extent does this transmission mechanism varies across sectors.
This paper empirically investigates the effect of a various measures of stock market liquidity, size, volatility, and integration on current and future rate of economic growth, capital accumulation, productivity improvements, and saving rate in 12 EMU countries between years 1990 and 2008. This investigation provides empirical evidence on the major theoretical debates regarding the link between stock markets and long-run economic growth. Moreover, we control for economic, legal, and political factors that may influence growth to gauge the sensitivity of the results to change in the conditioning information set. The introduction of the Euro as a common currency and the impact of the international financial crisis 07-09 are in particularly examined both on national and sectoral level. To control for the endogeneity bias induced by reverse causality running from GDP growth to financial integration, development of national financial markets and other explanatory variables, we use the GMM estimator proposed by Arellano and Bover (1995) and Blundell and Bond method of the dynamic panel framework.