Pot.icY RESEARCH WORKING PAPER 1462

# **Summary findings**

World stock markets are booming. Between 1982 and 1993, stock market capitalization grew from $2 trillion to $10 trillion, an average 15 percent a year. A disproportionate amount of this growth was in emerging stock markets, which rose from 3 percent of world stock market capitalization to 14 percent in the same period.

Yet there is little empirical evidence about how important stock markets are to long-term economic development. Economists have neicher a common concept nor a common measure of stock market development, so we know little about how stock market development affects the rest of the financial system or how corporations finance themselves.

Demirgiiq-Kunt and Levine collected and compared , many different indicators of stock market development using data on 41 countries from 19986 to 1993. Each indicator has statistical and conceptual shortcomings, so they used different measures of stock market size, liquidity, concentration, and volatility, of institutional development, and of international integration. Their goal: to summarize information about a variety of indicators for stock market development, in order to facilitate research into the links between stock markets, economic development, and corporate financing decisions. They highlight certain important correlations: In the 41 countries they studied, there are enormous cross-country differences in the level of stock market development for each indicator. The ratio of market capitalization to CDP, for example, is greater than 1 in five countries and less than 0.10 in five others.

* There are intuitively appealing correlations among indicators. For example, big markets tend to be less volatile, more liquid, and less concentrated in a few stocks. Internationally integrated markets tend to be less volatile. And institutionally developed markets tend to he large and liquid.

* The three most developed markets are in Japan, the United Kingdom. and the United States. The most underdeveloped markets are in Colombia, Nigeria, Venezuela, and Zimbabwe. Malaysia, the Republic of Korea, and Switzerland seem to have highly developed stock markets, whereas Argentina, Greece, Pakistan, and Turkey have underdeveloped markets. Markets tend to be more developed in richer countries, but mans markets commonly labeled "emerging" (for example, in Korea, Malaysia, and Thailand) are systematically more developed than markets commonly labeled "developed" (for example, in Australia, Canada, and many European countries).

* Between 1986 and 1993, some markets developed rapidly in size, liquidity, and international integration. Indonesia, Portugal, Turkey, and Venezuela experienced explosive development, for example. Case studies on the reasons for (and economic consequences of) this rapid development could yield valuable insights.

The level of stock market development is highly correlated with the developmenit of banks, nonbank financial institutions (finance companies, mutual funds, brokerage houses), insurance companies, and private pension funds.

- - This paper a product of the Finance and Private Sector Development Division, Policy Research Department is part of a larger effort in the departmnent to study stock market development. The study was funded by the Bank's Research Support Budget under the research project "Stock Market Development and Financial Intermediary Growth" (RPO 67837). Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Paulina Sintim-Aboagye, roonm N9-057, extension 38526 (58 pages). May 1995.

**_The_** _Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of_ **_the_** _series_ **_is_** _to get the findings out quickly, even if the presentations are less than fully polished. 'The papers carry the names of the authors and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own and should not be attributed to the World Bank, its_ **_Executive_** _Board of Directors, or any of its member c ountries._

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