Bank development and GDP

In this thesis the results regarding volatility, measured as standard deviation on the stock market, indicated that no causal relationship could be established to economic growth. These results are consistent with the findings in the study of Arestis, Demetriades and Luintel (2001) which also found volatility to have negative effect on economic growth. The authors argue that volatility tends to be smaller on larger stock exchanges than on smaller stock exchanges. Their surveys were conducted in relatively large countries, with a large stock market and according to their argument this should indicate that the countries have a smaller volatility.

The study of Arestis, Demetriades and Luintel (2001) still received statistically insignificant results. Sweden who has relatively small stock exchange, compared to the countries in the other study, should according to their argument have a higher volatility. The insignificant results in both studies makes it hard to draw a definitive conclusion on this issue. However, the results may suggest that volatility of any kind causes greater economic uncertainty and is, therefore, negatively correlated to economic growth.

This study found evidence for several variables connected to the stock market that there exists a significant causal relationship between stock market development and economic growth. The study also found that GDP in several cases also precedes changes in the stock market, i.e. economic growth Granger causes the stock market. This result corresponds to previous research made by Nieuwerburgh et al. (2006), who also established a bidirectional relationship between the stock market and economic growth.

6.3 Bank development and GDP

The direction of causality between banking development and economic growth was also investigated. The results from the tests, with both one and two lags in the regressions, showed that banking development and GDP were not statistically significant from zero. This indicate that the null hypotheses could not be rejected. Thus, one can conclude that banking development does not Granger cause economic growth, neither do economic growth cause banking development in Sweden. The results of this study have great similarities with previous studies of Marques, Fuinhas, and Marques (2013). The authors examined the causal relationship between banking development and economic growth in Portugal and also received insignificant results. Numerous previous studies have found that banking development has a positive relationship with economic growth. (Levine & Zervos 1998; Atje & Jovanovic 1993). Thus, a positive relationship does not have to indicate a causal relationship. This study only examined if there existed a causal relationship between banking development and economic growth. Although a causal relationship

could not be established, it is still impossible to exclude the existence of a relationship were the two variables affect each other.

The study of Caporale, Howells and Soliman (2004) detected bidirectional Granger causality between banking development and economic growth in two of the seven countries that were examined. Surprisingly, in this study, Portugal was one of the countries where bidirectional causality was identified. Which was not the case in the study done by Marques et al. (2013). Similar measures of the banking sector’s development were used in both countries. However, Marques et al. (2013) identified economic development of Portugal with real GDP per capita while Caporale et al. (2004) used GDP alone, which may be a reason why the results differ. The results in this study indicated that it did not exists any causality between the banking development to economic growth, neither between economic growth to banking development.

The economic development between Sweden and Portugal differs significantly, but the study’s outcome reflects the results of Marques et al. (2013). Similarities in the results are surprising because different measurements of economic growth are used in each study.

There are also examples of previous studies which have found evidence of Granger causality between the banking sector and economic growth. The study of Nieuwerburgh, Buelens and Cuyvers (2006) on Belgium could determine a unidirectional causal relationship between the banking sector’s development and GDP, which means that bank development Granger cause economic growth. Based on the data collected from the World Bank (2020) the economic growth in Sweden, measured in GDP per capita, looks to be more similar to the economic growth in Belgium rather than the one that can be seen in Portugal. Based on this, the authors of this study made the assumption that the results of their investigation would correspond with results from the study made in Belgium by Nieuwerburgh, Buelens and Cuyvers (2006). The result of this study instead reflects the survey performed by Marques et al. (2013), that showed no Granger causality between the development of the banking sector and economic growth. The differences in the results may indicate that other underlying factors, or variables, are crucial to identify whether there exists a causal relationship between the banking sector’s development and economic growth or not.

Concerning the two components of the financial system, two appearances are observed. First, a positive causal relationship between stock market development and economic growth is detected and, in fact, it is bidirectional. Thus, one measure of the stock market, volatility, didn’t show any causal relationship to economic growth. Second, it appears that there do not exits any causal relationship between the banking development and economic growth.

7. Conclusion

The aim of the study was to investigate if there existed causality between the financial system and economic

- Is there a causal Granger relationship between OMXSPI and GDP per capita?

- Is there a causal Granger relationship between Bank development and GDP per capita?

- Is there a jointly causal Granger relationship between Stock market variables and GDP per capita?

- Is there a separately causal Granger relationship between Stock market variables and GDP per capita?

The result of the first hypothesis showed that OMXSPI Granger cause GDP and also that GDP Granger cause OMXSPI. This means that the causality between the stock market development and economic growth are bidirectional, one can not determine which of the variable that occurs first, but that they affect each other. The outcome of the second hypothesis showed that the bank development does not Granger cause GDP and that GDP does not Granger cause bank development. This implies that the bank development does not precede economic growth and that economic growth does not precede the bank development.

The result when the stock market variables were tested jointly showed that liquidity and volatility jointly Granger caused GDP. This means that the stock market variables precede economic growth. The outcome of the last hypothesis showed that variable volatility does not granger cause GDP, but the variable liquidity Granger caused GDP. This implies that volatility does not precede economic growth, but liquidity precede economic growth.

The results of this study have filled an existing cavity in science. The study is conducted and based on similar research done for other countries. The outcome indicates that there exists a Granger causality between the stock market and economic growth and between the stock market variables, connected to liquidity, and economic growth. These findings are consistent with previous research. The result also indicates that no causality is identified when the variable volatility and economic growth are investigated, the result is consistent with previous research. No causality could be identified between the bank development and economic growth. The outcome is not consistent with the study done on Belgium but correspond to the study done on Portugal.

8. References

Agresti, A., Klingenberg, B., & Franklin, C. (2017). Statistic: The art and Science of Learning from Data. 4th ed.

Upper Saddle River: Pearson.

Arestis, P., Demetriades, O., & Luintel, B. (2001). Financial Development and Economic Growth: The Role of Stock Markets. Ohio State University Press. 33(1): pp.16–41

https://www.jstor.org/stable/2673870

Atje, R. & Jovanovic, B. (1993). Stock Markets and Development. European Economic Review. 37(2): pp.632- 640. https://doi.org/10.1016/0014-2921(93)90053-D

Bangake, C., & Eggoh, C. (2011). Further evidence on finance-growth causality: A panel data analysis.

Economic Systems.35(2). pp.176-188. http://dx.doi.org/10.1016/j.ecosys.2010.07.001 Bencivenga, V.R., Smith, B.D. & Starr, R.M. (1995). Transactions Costs, Technological Choice and

Endogenous Growth. Journal of Economic Theory. 67(1). pp.153-177.

http://dx.doi.org/10.1006/jeth.1995.1069

Bodie, Z., Kane, A., & Marcus, A. (2018). Investment.11th ed. New York: McGraw-Hill Education.

Boubakari, A., & Jin, D. (2010). The Role of Stock Market Development in Economic Growth: Evidence from Some Euronext countries. International Journal of Financial Research. 1(1): pp.14-20.

http://dx.doi.org/10.5430/ijfr.v1n1p14

Caporale, G.M., Howells, P. & Soliman, A.M. (2004). Stock market development and economic growth:

The causal linkage. Journal of Economic Development. 29(1). pp. 33–50. http://www.jed.or.kr/full-text/29- 1/02_J665_.PDF :

Datar, T., Narayan, Y., & Radcliffe, R. (1998). Liquidity and stock returns:An alternative test. Journal of Financial Markets. 1(2): pp. 203-219. https://doi.org/10.1016/S1386-4181(97)00004-9

Demirguc-Kunt, A. & Levine, R. (1996). Stock Markets, Corporate Finance, and Economic Growth: An Overview. The World Bank Economic Review. 10(2): pp. 223–239. www.jstor.org/stable/3990061 Finansinspektionen. (2019). Bankbarometer. Stockholm: Finansinspektionen.

https://www.fi.se/contentassets/1be782b6ad604b7999a2adabae93b610/bankbarometern-april-2019.pdf [2020-05-01]

Gujarati, N., & Porter, C. (2009). Basic Econometrics. 5th ed. Boston: McGraw-Hill

Khan, M.S., & Senhadji, A.S. (2000). Financial Development and Economic Growth: An Overview.

International Monetary Fund.pp.3-

23.https://www.imf.org/external/pubs/ft/wp/2000/wp00209.pdf.

King, R. & Levine, R. (1993). Finance and Growth: Schumpeter Might be Right. The Quarterly Journal of Economics. 108(3): pp.717-737 http://dx.doi.org/10.2307/2118406

Kissell, R. (2014). The Science of Algorithmic Trading and Portfolio Management. [Electronic resource]. Academic Press. https://www.academia.edu/32179312/The_Science_

of_Algorithmic_Trading_and_Portfolio_Management

Korajczyk, R.A. (1996). A Measure of Stock Market Integration for Developed and Emerging Markets. The World Bank Economic Review.10(2). pp.267-289. http://dx.doi.org/10.1093/wber/10.2.267.

Leamer, E. E. (1985). Vector autoregression for causal interference? Carnegie-rochester conference series on Public Policy. Vol. 22. pp.255–304. https://doi.org/10.1016/0167-2231(85)90035-1 Levine, R. (1991). Stock Markets, Growth, and Tax Policy. The Journal of Finance. 46(4): pp. 1445-1465.

https://doi.org/10.1111/j.1540-6261.1991.tb04625.x

Levine, R. & Zervos, S. (1998). Stock Markets, Banks & Economic Growth. American economic Association.

88(3): pp 537–558. https://www.jstor.org/stable/116848

Marques, L.M., Fuinhas, J.A. & Marques, A.C. (2013). Does the stock market cause economic growth?

Portuguese evidence of economic regime change.Economic Modelling. Vol. 32. pp.316-324.

https://doi.org/10.1016/j.econmod.2013.02.015

Mishkin, F.S. (2007). The Economics of Money, Banking and Financial Markets. 8. ed. Boston: Pearson/Addison Wesley

Nasdaq (2018). NASDAQ OMX All-Share,Benchmark and Sector Indexes.

https://indexes.nasdaqomx.com/docs/Methodology_NORDIC.pdf [2020-04-24]

Nasdaq (2020). OMXSPI http://www.nasdaqomxnordic.com/index/historiska_kurser?Instrument=

SE0000744195 [2020-04-27]

Nationalencyklopedin. [n.d]. Kvantitativ metod. https://www.ne.se/uppslagsverk/encyklopedi/lång/

kvantitativ-metod [2020-04-20]

Nieuwerburgh, S.V., Buelens, F. & Cuyvers, L. (2006). Stock market development and economic growth in Belgium. Explorations in Economic History, 43(1): pp.13-38

https://doi.org/10.1016/j.eeh.2005.06.002

Obstfeld, M. (1994). Risk Taking, Global Diversification and Growth. American Economic Association. 84(5):

1310-1329 https://www.jstor.org/stable/2117774

Paudel, N. P. (2005). Financial system and economic development. Nepal Rastra Bank in Fifty Years, Part–II, Financial System. pp. 177-201. https://www.nrb.org.np/contents/uploads/2019/12/

Golden_Jubilee_Publications-Nepal_Rastra_Bank_in_Fifty_Years__Part-II_-Financial_System.pdf

Pettersson, F., Sjöholm, G., & Hård, F. (2019). Fondmarknadens utveckling 1979–2019: Så blev Sverige världsmästare i fondsparande. Stockholm: Fondbolagens förening

Riksbanken. (2018). Det finansiella systemet. Stockholm: Riksbanken

https://www.riksbank.se/sv/finansiell-stabilitet/det-finansiella-systemet/ [2020-06-09]

Schumpeter, J. A. (1934). The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. Cambridge: Mass

Sida. (2009). Tillväxt som gynnar de fattiga. Stockholm: Sida

https://www.sida.se/globalassets/global/about-sida/sa-arbetar vi/sida51481sv_tillvaxt _som_gynnar_de_fattiga1.pdf [2020–06]

Stenfors, A., Clark, E., Farahani, I. & Hansen, A.L. (2014). The Swedish Financial System. Portsmouth:

FESSUD http://fessud.eu/wp-content/uploads/2012/08/

The-Swedish-financial-system_FESSUD-studies-in-financial-systems-13.pdf Studenmund, A.H. (2017). A practical guide to using econometrics. 7th ed. Harlow: Pearson The World Bank. (2020). Domestic Credit to Private Sector by Banks.

https://datacatalog.worldbank.org/domestic-credit-private-sector-banks-gdp [2020-04-26]

The World Bank (2020). GDP (current US$) - Sweden.

https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=SE [2020-04-20]

Tsouma, E. (2009). Stock returns and economic activity in mature and emerging markets. The Quarterly Review of Economics and Finance. 49(2). pp.668-685. http://dx.doi.org/10.1016/j.qref.2008.02.002.

Thuren, T. (2007). Vetenskapsteori för nybörjare. 2nd ed. Stockholm: Liber

Weil, D. N. (2013). Economic Growth. 3th ed. Harlow: Pearson Education Limited