STOCK MARKET DEVELOPMENT: IDENTIFIKASI FAKTOR DETERMINAN DAN PEMAHAMAN KARAKTERISTIK

Abstract

This thesis aims to analyze the influence of factors that expected to be determinants of the stock market development such as economic growth, inflation rate, exchange rate, foreign direct investment, trade openness, stock market liquidity, and banking sector development, the results are expected to be able to explain the factors that determine the development of the stock market in developing countries. The measure of stock market development used in this study is the ratio of market capitalization/GDP of each country. This research uses the fixed effect model method with panel data from 11 emerging market countries in 2008-2017. The results showed that the variables of economic growth, inflation rate, trade openness, and stock market liquidity significantly influence the stock market development process. Meanwhile, exchange rate, foreign direct investment, and the banking sector development show insignificant results, which means the exchange rate, foreign direct investment, and the banking sector development are not a determinant factor in the development of the stock market. These results validate the demand-following hypothesis which shows that economic growth drives the performance of the stock market in developing countries. This research concludes by emphasizing three main characteristics of stock market development in developing countries. First, the development of the stock market is a dynamic, complex and long-term concept. Second, the development of the stock market is an important part of financial deepening. Third, the development of the stock market is a private sector activity that requires support from the government in accelerating the adjustment process towards efficient market conditions.