The Mediation Effect of Country Risk in the Nexus Between Stock Market Development and Economic Growth: Evidence From Developing Countries

Abstract

The aim of this paper was to investigate the mediation effects of a country’s (a) political risk (PR), (b) economic risk (ER), and (c) financial risk (FR) in the relationship between domestic stock market development (SMD) and economic growth (EG) in developing countries. SMD was measured: (a) once by total value of domestically-traded stock as a percentage of GDP (TVDTS/GDP), (b) once by stock market turnover ratio (SMTR), and (c) once by stock market capitalization as a percentage of GDP (SMC/GDP). EG was measured in terms of annual growth of real GDP (GDPG). PR, ER and FR were measured using the World Bank’s International Country Risk Guide’s political, economic and financial risk scales, respectively. Structural equation modeling was used to analyze panel data from 23 developing economies for the years 2007-2017. Our results revealed a significant positive indirect effect of TVDTS/GDP on GDPG through PR and FR, and a significant positive indirect effect of SMTR on GDPG through PR.