The Effect Of Stock Market On Gdp Growth

1991 Words Apr 20th, 2015 8 Pages
Extensive amount of studies have been undertaken to examine the effect of stock market on GDP growth. Some of the studies on this topic are Demirguc-Kunt and Levine (1995), Levine and Zervos (1993, 1995, 1998) etc. In theory well developed stock market should enduce saving and efficiently allocate capital to productive investments which would later lead to increase in the rate of real output. Stock markets contribute to accumulation of domestic savings by enhancing the scope of financial instruments available to savers and investors trough diversification of their portfolios. Dailami and Aktin (1990) think stock markets provide important source of capital investment at low cost which should serve as an obvious benefit for the economy in general. In developed economies with developed stock markets share ownership provides individuals with probably the most liquid means of sharing the risks and benefits of investing in promising projects. The main advantage of liquid stock market is that it provides investors to cope with liquididy risk by allowing participants hit by illiquidity constraints to sell their stakes to othe participants who at the time do not suffer form the same problem. These transactions are done in real time with frictions in the market being at the minimum. The ending result of this process is that capital is not prematurely withdrawn form firms to meet short term liquidity need. It is just changing hands. Stock markets also play an important role in…
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