The Growth of Global Equity Markets: A Closer Look

This paper presents both the time-series and cross-country evidence on the growth of global equity markets and attempts to shed some light on the sources of equity market growth. Using data on 33 countries, I find that development of financial intermediaries and openness to trade are positively associated with the size and activity of equity markets, while government consumption is negatively associated with equity market activity and liquidity. Under the stochastic frontier modeling approach, the legal and institutional characteristics of a country are assumed to affect its equity market development through the channel of institutional efficiency. I show that there are wide differences in institutional efficiency across countries and over time and, Canada, the United States and Singapore possess the most investor-friendly institutional framework that enhances stock market development. My most striking finding is that improvements in institutional efficiency, and changes in investor sentiment, appear to be the driving force behind the phenomenal expansion of global equity markets over the past two decades.