Quality of Financial Markets: Case Study from Emerging Market Economies

Abstract

This paper investigates the quality aspect of financial markets in emerging economies and the key variables to achieve a desired level of quality. In our panel analysis, 17 major emerging countries were taken as a sample to analyze the relationship between quality of financial markets and the factors that affect quality. To measure the quality of financial markets, composite indexes were created that reflect the degree of financial market accessibility, depth, and efficiency. Besides, the indexes include the liquidity, diversity, and the institutional environment of financial markets in emerging economies.  The variables include financial institutions access, depth, and efficiency on one set and on the other set financial market access, depth, and efficiency. The indexes and sub-indexes were extracted from the database of International Monetary Fund’s International Financial Statistics office that holds global dataset of main indicators. Besides, World Development Indicators (WDI) indexes were employed to the research. We found that quality of financial markets and growth of financial development are highly correlated to each other. The disaggregated components of the quality measure suggest that it is the level of legal and institutional development along with accessibility, depth, and efficiency that affects the overall financial market growth. Hence, financial market quality. Our simple regressions show that the quality measures of financial markets have a positive output on higher quality of financial markets and growth of financial development. The causality of relationships between the components of financial markets and components of financial institutions were proven to have negative correlation showing that countries that pay more attention to the growth of financial institutions usually have less developed financial markets. This is mainly due to the fact that their markets are bank-based markets with highly regulated policies.

Keywords: Financial Market Quality, Emerging Economies, Financial Development, Financial market growth

DOI: 10.7176/RJFA/12-6-08

Publication date:March 31^st 2021