Key Factors in the Development of Capital Markets Globally

Abstract

This research paper investigates the impact of macroeconomic and institutional factors on the development of capital markets, measured as the ratio of market capitalization to gross domestic product (GDP), on panel data from 47 stock exchanges, both mature and developing markets, from 2008 to 2020. Despite overall economic growth and an increase in market capitalization to GDP ratio between 2008 and 2020, nearly half of the markets experienced negative trends in the post-pandemic and wartime period of 2020. Key findings from regression and VAR models highlight the significant influence of local bank credit, political stability, and broad money on capital market development, with a positive long-term impact of lending interest rates, but a negative effect of foreign direct investment on market capitalization. Policy recommendations include focusing on political stability, promoting financial intermediation, improving SME access to credit, and maintaining moderate inflation and low-interest rates to foster a stable investment environment and encourage public participation in capital markets through education initiatives.