Analysing the macroeconomic drivers of stock market development in the Philippines

Ho, Sin-Yu; Odhiambo, N. M. A icle Analysing he mac oeconomic d i e s o s ock ma ke de elopmen in he Philippines Cogen Economics & Finance P o ided in Coope a ion wi h: Taylo & F ancis G oup Sugges ed Ci a ion: Ho, Sin-Yu; Odhiambo, N. M. (2018) : Analysing he mac oeconomic d i e s o s ock ma ke de elopmen in he Philippines, Cogen Economics & Finance, ISSN 2332-2039, Taylo & F ancis, Abingdon, Vol. 6, Iss. 1, pp. 1-18, h ps://doi.o g/10.1080/23322039.2018.1451265 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/194770 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. 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Odhiambo 1 Abs ac :This pape analyses he mac oeconomic d i e s o s ock ma ke de elop- men in he Philippines du ing he pe iod 2001Q4–2016Q4. In pa icula , he pape examines he impac o banking sec o de elopmen , in la ion a e, exchange a e, economic g ow h, ade openness and s ock ma ke liquidi y on he de elopmen o he Philippine s ock ma ke . Theo e ical and empi ical li e a u e e eals di e se iews on he ela ionship be ween each de e minan and s ock ma ke de elop- men . In addi ion, he Philippine s ock ma ke has expe ienced ema kable g ow h in ecen decades. Howe e , he e is no simila s udy on his coun y in he li e a- u e. The pape , he e o e, en iches he li e a u e by in es iga ing he mac oeco- nomic d i e s o s ock ma ke de elopmen in he Philippines using he ARDL bounds es ing p ocedu e. The esul s show ha ade openness has had a nega i e impac on Philippine s ock ma ke de elopmen in he long un, whe eas banking sec o de elopmen and he exchange a e ha e had posi i e impac s on he de elopmen o he Philippine s ock ma ke in he sho un. These indings a e obus o al e na- i e speci ica ions o he model. Subjec s: Economics; Econome ics; Finance Keywo ds: mac oeconomic d i e s; s ock ma ke de elopmen ; he Philippines; ARDL bounds es ing JEL codes: C22; E44; G23 *Co esponding au ho : Sin-Yu Ho, Depa men o Economics, Uni e si y o Sou h A ica, P.O. Box 392, UNISA 0003, P e o ia, Sou h A ica E-mails: [email p o ec ed]a, alicehosin[email p o ec ed] Re iewing edi o : Da id McMillan, Uni e si y o S i ling, UK Addi ional in o ma ion is a ailable a he end o he a icle ABOUT THE AUTHORS Sin-Yu Ho is a senio lec u e a he Depa men o Economics o he Uni e si y o Sou h A ica whe e she ocuses on opics ela ing o de elopmen inance, s ock ma ke s, eme ging ma ke s and de eloping coun ies. N.M. Odhiambo is a p o esso a he Depa men o Economics o he Uni e si y o Sou h A ica. His esea ch ocuses on issues in mac oeconomics, including bu no limi ed o inancial de elopmen , po e y, economic g ow h, go e nmen expendi u e and ene gy consump ion. PUBLIC INTEREST STATEMENT The Philippine s ock ma ke has expe ienced phenomenal g ow h in ecen decades. The global anking o he s ock exchange imp o ed om 55 h in 2005 o 12 h in 2014 as measu ed by he ma ke capi alisa ion a io. In iew o his ema kable g ow h, his pape analyses he mac oeconomic d i e s o s ock ma ke de elopmen in he Philippines du ing he pe iod 2001Q4–2016Q4. The s udy shows ha ade openness has had a nega i e impac on Philippine s ock ma ke de elopmen in he long un, whe eas banking sec o de elopmen and he exchange a e ha e had posi i e impac s on he de elopmen o he Philippine s ock ma ke in he sho un. Based on hese indings, policymake s should p omo e he use o equi y inancing in he p oduc ion o main expo s, enhance banking sec o de elopmen , and main ain he s abili y o i s domes ic cu ency o os e s ock ma ke de elopmen . Recei ed: 29 Sep embe 2017 Accep ed: 08 Ma ch 2018 Fi s Published: 13 Ma ch 2018 © 2018 The Au ho (s). This open access a icle is dis ibu ed unde a C ea i e Commons A ibu ion (CC-BY) 4.0 license. Page 1 o 18 Page 2 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 1. In oduc ion Wha a e he key mac oeconomic d i e s o s ock ma ke de elopmen ? A numbe o s udies show he impo ance o s ock ma ke s in p omo ing economic g ow h h ough a ious channels. These channels encompass educing he cos o mobilising sa ings, p o iding ma ke liquidi y, imp o ing co po a e go e nance and p omo ing in e na ional isk-sha ing (see Benci enga, Smi h, & S a , 1996; G eenwood & Smi h, 1997; Jensen & Mu phy, 1990; Le ine, 1991; Obs eld, 1994). Owing o i s impo ance, an inc easing numbe o s udies ha e ied o answe he ques ion by in es iga ing he ac o s leading o he g ow h o s ock ma ke s. The mac oeconomic ac o s being iden i ied include economic de elopmen , banking sec o de elopmen , in la ion a e, exchange a e, o eign di ec in es men , ade openness and s ock ma ke liquidi y. While he e is a numbe o s udies examining he ac o s leading o he s ock ma ke de elop- men , he exis ing li e a u e shows ha he ela ionship be ween each o he mac oeconomic ac- o s and s ock ma ke de elopmen is highly deba able. Fo example, on he ela ionship be ween he banking sec o and he s ock ma ke , some s udies show ha hey a e nega i ely ela ed, while o he s show ha hey a e posi i ely ela ed (see, o example, El-Nade & Al aimony, 2013; Le ine, 1997, 2005). Fo he in la ion a e, exis ing s udies also show inconclusi e esul s. Some a gue ha a highe in la ion a e has a nega i e impac on s ock ma ke de elopmen , whe eas o he s a gue ha he in la ion a e can be posi i ely associa ed wi h s ock ma ke e u ns in a high in la iona y en i onmen (see Ben Naceu , Ghazouani, & Om an, 2007; Boyd, Le ine, & Smi h, 1996, 2001). Wi h ega d o he exchange a e, s udies also show mixed esul s conce ning he ela ionship be ween exchange a e beha iou and s ock ma ke pe o mance (see Ga in, 1989; Phylak is & Ra azzolo, 2005). On he ela ionship be ween o eign di ec in es men (FDI) and s ock ma ke de elopmen , s udies also e eal opposing iews (see Hausmann & Fe nández-A ias, 2000a, 2000b; Malik & Amjad, 2013). On he ela ionship be ween ade openness and s ock ma ke de elopmen , some s udies show ha ade openness exe s a posi i e impac on s ock ma ke de elopmen , whe eas o he s ind ha i hu s s ock ma ke de elopmen (see Kim, Lin, & Suen, 2011; Ni oomand, Hajilee, & Al Nasse , 2014; Rajan & Zingales, 2003). To sum up, he li e a u e e eals di e se iews on he impac o mac oeconomic ac o s on s ock ma ke de elopmen . Agains his backg ound, his pape con- ibu es o he exis ing deba e by in es iga ing he impac o a ious mac oeconomic ac o s on s ock ma ke de elopmen in he Philippines. In ecen decades, he Philippine s ock ma ke has expe ienced phenomenal g ow h. Measu ed in e ms o he sha e p ice index, namely PSEi, i inc eased om 1,869 poin s in 1997 o 7,230 poin s in 2014 (PSE, 2000–2014; Wo ld Fede a ion o Exchanges [WFE], 2015). The g ow h momen um was shown by he consecu i e g ow h o PSEi du ing he pe iod 2009–2014, wi h a cumula i e g ow h o 286 pe cen in hese six consecu i e yea s (WFE, 2015). In addi ion, he ex ao dina y g ow h o he s ock ma ke in he coun y can be indica ed by he size o he s ock ma ke as measu ed by he ma ke capi alisa ion a io. The global anking o he PSE imp o ed om 55 h in 2005 o 12 h in 2014 (Wo ld De elopmen Indica o s [WDI], 2016). Despi e i s ema kable g ow h, he e is, o he bes o ou knowledge, no simila s udy on he d i e s o s ock ma ke de elopmen in he Philippines. The e o e, his pape en iches he li e a u e by in es iga ing he mac oeconomic d i e s o s ock ma ke de elopmen in he coun y using au o eg essi e dis ibu ed lag (ARDL) bounds es ing echnique. The es o he pape is o ganised as ollows: Sec ion 2 p o ides an o e iew o s ock ma ke de- elopmen in he Philippines. Sec ion 3 discusses he heo e ical and empi ical unde pinning o he de e minan s o s ock ma ke de elopmen . Sec ion 4 ou lines he empi ical me hodology and he da a. Sec ion 5 p esen s he empi ical esul s. Finally, Sec ion 6 concludes he pape . Page 3 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 2. S ock ma ke de elopmen in he Philippines The Philippine S ock Exchange (PSE), namely he Manila S ock Exchange es ablished in 1927, is one o he oldes s ock exchanges in Asia (PSE, 2015; Visda, C isos omo, & Padilla, 2013). O e ime, he numbe o lis ed secu i ies inc eased as public in e es g ew. In 1963, a second s ock exchange, namely he Maka i S ock Exchange, was es ablished and s a ed o ope a e in 1965 in Maka i (PSE, 2012; Wo ld Bank, 1992). Du ing he 1970s, s ock ma ke ac i i ies we e insigni ican bo h in abso- lu e and ela i e e ms compa ed wi h o he inancial sec o s. The ading olume was small and many lis ed companies we e inac i e o a signi ican pe iod o ime. Companies lis ing on he ex- changes mainly consis ed o hose in he mining and oil sec o s, whe e pu ely specula i e mo e- men s ook place (Wo ld Bank, 1992). In o de o e i alise he s ock ma ke , he coun y has unde gone a se ious o e o ms since he 1990s. These e o ms include he uni ica ion o he wo s ock exchanges, he demu ualisa ion o he s ock exchange, and he enac men o he Secu i ies Regula ion Code (see Ho & Odhiambo, 2015). The aim o he s ock exchanges uni ica ion was o educe con usion among in es o s. Such con u- sion s emmed om he di e en policies, di e en membe s, and, mos impo an ly, di e en p ices o he same lis ed s ocks on he wo s ock exchanges (PSE, 2015). Ano he eason o he uni ica ion o he exchanges was o achie e economies o scale h ough educing ope a ing cos s. The e o e, in 1992, he go e nmen in oduced a policy o consolida ing he ope a ions o he wo exchanges, and a uni ied s ock exchange named he Philippine S ock Exchange (PSE) was inco po a ed (PSE, 2015). This measu e encou aged he de elopmen o a mo e e icien capi al ma ke by ensu ing a le el playing ield o all in es o s, by consolida ing logis ics, and, as s a ed, by educing ope a ing cos s (see De los Angeles, 1995). Ano he undamen al change was he demu ualisa ion o he s ock exchange in 2001 (Akh a , 2002). Du ing he p ocess o demu ualisa ion, he PSE was ans o med om a membe s’ associa- ion in o a o -p o i s ock co po a ion, in he p ocess e ol ing in o a new co po a e, legal and busi- ness model. In he cou se o i s ans o ma ion, he PSE unde wen a se ies o s uc u al changes in e ms o owne ship s uc u e, he business o he s ock exchange, ading igh s, co po a e go e n- ance, and i s s a u o y egula o y ole (Alinsunu in, 2002). La e , in 2003, he PSE was lis ed by way o in oduc ion, which signi ican ly educed b oke owne ship (Akh a , 2002). Alongside he s uc- u al e o ms unde aken by he PSE, e o ms we e ca ied ou o imp o e he egula o y capaci y o he Secu i ies and Exchange Commission (SEC). The SEC was es ablished by he go e nmen ea ly in 1936 as a p ima y egula o y au ho i y in espec o he capi al ma ke s (Wo ld Bank, 1992). Howe e , he e ec i eness o he SEC was hinde ed by he esou ce-in ensi e asks such as company egis a- ion and moni o ing, and quasi-judicial unc ions (In e na ional Mone a y Fund [IMF], 2004; SEC, 2015). To allow he SEC o unc ion e ec i ely, he Secu i ies Regula ion Code (SRC) was enac ed in 2000, which led o o ganisa ional change and capi al-building (IMF, 2004). The majo achie emen s b ough abou by he SRC we e con i med by he assessmen o secu i y- egula ion p inciples con- duc ed by he IMF. The epo no ed ha he coun y had pe o med e y well agains he p inciples o he In e na ional O ganisa ion o Secu i ies Commissions (IMF, 2004). As a esul o all he e o ms, he Philippine s ock ma ke has expe ienced phenomenal g ow h o e he yea s. Measu ed by he sha e p ice index, he PSEi gene ally ended upwa d du ing he pe iod 1997–2014. I inc eased om 1,869 poin s in 1997 o 7,230 poin s in 2014 (PSE annual e- po s, 2000–2014; WFE, 2015). The g ow h momen um was shown by he consecu i e g ow h o he PSEi du ing he pe iod 2009–2014, wi h a cumula i e g ow h o 286 pe cen in hese six consecu i e yea s (WFE, 2015). In addi ion, he ex ao dina y g ow h o he s ock ma ke in he coun y was shown by he ma ke capi alisa ion a io. As indica ed abo e, he global anking o he PSE imp o ed om 55 h in 2005 o 29 h in 2010, and leaped o 12 h in 2014 (WDI, 2016). As shown in Figu e 1, he ma ke capi alisa ion a io expe ienced an upwa d end, wi h ola ile mo emen s om 1990–2014. The a io inc eased ema kably om 13 pe cen in 1990 o 92 pe cen in 2014, wi h an a e age o 8 pe cen annual g ow h (WDI, 2016). Howe e , he liquidi y o he Philippine s ock ma ke as meas- u ed in e ms o u no e a io has been low o e he pas wo decades. In pa icula , he Philippines Page 4 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 had he leas liquid s ock ma ke in e ms o u no e a io among he ASEAN-5 coun ies1 du ing he pas wo decades. Figu e 1 shows he ma ke capi alisa ion a io o he PSE du ing he pe iod 1990– 2014. Figu e 2 shows he u no e a ios o he ASEAN-5 s ock exchanges du ing he pe iod 1990–2014. 3. Li e a u e e iew Owing o he impo ance o s ock ma ke s in p omo ing economic g ow h, he e a e an inc easing numbe o s udies in es iga ing he ac o s leading o he g ow h o s ock ma ke s. In he asse p ic- ing models,2 he e a e wo b oad ca ego ies o ac o s in luencing s ock p ices. The i s ca ego y is he mac oeconomic ac o s, including economic g ow h, o eign exchange, in la ion, indus ial p o- duc ion, in e es a es, oil p ices, s ock ma ke ola ili y, liquidi y o s ock ma ke , e u ns on in es - men and he isk ac o s ha in luenced he s a es o he cu en and u u e consump ion. The second ca ego y is he po olio cha ac e is ics. These cha ac e is ics include book-ma ke ela ions, di idends o ea nings, he size o company, he a e o e u n and he a iance o asse e u ns (see B eeden, 1979; Coch ane, 1991; Fama, 1965; Lin ne , 1965; Me on, 1973; Ross, 1976; Sha pe, 1964; S ulz, 1981a, 1981b). Apa om he asse p icing models, he e a e a huge olume o s udies linking s ock ma ke de- elopmen o a ious mac oeconomic ac o s. The mac oeconomic ac o s encompass: economic de elopmen , banking sec o de elopmen , in la ion a e, exchange a e, o eign di ec in es men , ade openness and s ock ma ke liquidi y. Howe e , he ela ionship be ween hese ac o s and he de elopmen o s ock ma ke a e highly deba able in he li e a u e (see Ho & Iyke, 2017). Rega ding he ela ionship be ween he de elopmen o he banking sec o and he s ock ma ke , he esul s o s udies a e inconclusi e. Some s udies a gue ha he banking sec o and s ock ma ke a e nega- i ely ela ed, while o he s sugges hey a e posi i ely ela ed. As a as nega i e ela ionship is conce ned, a ious s udies show ha he banking sec o pe o ms be e han he s ock ma ke in p o iding inancial unc ions o he economy (see Bhide, 1993; DeAngelo & Rice, 1983; S igli z, 1985). Howe e , o he s udies a gue ha he ocus should be on he impo ance o he o e all Figu e 1. The ma ke capi alisa ion a io o he PSE, 1990–2014. Sou ce: Au ho s’ own compila ion based on WDI (2016). Figu e 2. Tu no e a ios o he ASEAN-5 s ock exchanges, 1990–2014. Sou ce: Au ho s’ own compila ion based on WDI (2016). Page 5 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 inancial ma ke a he han he ela i e impo ance o he banking sec o compa ed wi h he s ock ma ke (see Le ine, 1997; Me on & Bodie, 1995, 2004). Fu he mo e, Le ine (2005) a gues ha he banking sec o and s ock ma ke a e posi i ely ela ed when hey p o ide inancial se ices o he economy. On he empi ical on , howe e , many s udies show ha he banking sec o and s ock ma ke a e posi i ely ela ed. These s udies include hose o Ga cia and Liu (1999), Ben Naceu e al. (2007), Ku ach (2010), Ya ey (2007, 2010), El-Nade and Al aimony (2013), and Ho (2017). As a as he in la ion a e is conce ned, exis ing s udies show inclusi e esul s on he ela ionship be ween in la ion a e and s ock ma ke de elopmen . On he one hand, some a gue ha a highe in la ion a e has nega i e impac on s ock ma ke de elopmen . Fo example, heo e ical s udies such as Aza iadas and Smi h (1996), Choi, Smi h, and Boyd (1996), Huybens and Smi h (1998, 1999) and Boyd e al. (2001) a gue ha highe in la ion a es a e associa ed wi h less liquid and smalle s ock ma ke s. In addi ion, hey demons a e ha he e exis s a non-linea ela ionship be ween he in la ion a e and inancial ma ke de elopmen , including s ock ma ke de elopmen . The empi ical s udies also suppo he a gumen ha he e is a nega i e and non-linea ela ionship be ween he in la ion a e and s ock ma ke de elopmen (see Baya , 2016; Ben Naceu e al., 2007; Boyd e al., 1996, 2001; Ho, 2017; Şük üoğlu & Nalin, 2014). On he o he hand, o he s udies e eal ha in la ion a e can ha e posi i e impac on he s ock ma ke h ough s ock e u ns in a high in la iona y en i- onmen (see Ba nes, Boyd, & Smi h, 1999; Boyd e al., 1996, 2001). In e ms o he exchange a e, economic heo ies demons a e a s ong associa ion be ween ex- change a e beha iou and s ock ma ke pe o mance. They a gue ha cu ency app ecia ion (o dep ecia ion) can ha e a nega i e (o posi i e) impac on s ock p ices (see Do nbusch & Fishe , 1980; Jo ion, 1991). On he o he hand, Ga in (1989) indica es ha he ela ionship be ween exchange a e and s ock p ices can be posi i e o nega i e unde di e en condi ions. Such inconclusi e esul s a e also ound in he empi ical s udies. Fo example, Ma and Kao (1990) ind ha cu ency app ecia- ion ad e sely a ec s he s ock ma ke in an expo -o ien ed economy, while i posi i ely a ec s he s ock ma ke in an impo -o ien ed economy. In con as , Phylak is and Ra azzolo (2005) show ha s ock p ices and exchange a es a e posi i ely ela ed. On he ela ionship be ween FDI and s ock ma ke de elopmen , exis ing heo e ical s udies e- eal opposing iews. Some s udies a gue ha FDI is simply a subs i u e o domes ic s ock ma ke de elopmen , whe eas o he s show ha FDI p omo es he g ow h o s ock ma ke s (see Claessens, Klingebiel, & Schmukle , 2001; Hausmann & Fe nández-A ias, 2000a, 2000b). These opposing iews a e also ound in he empi ical s udies. Fo example, Je us (2004) examines he na u e o he as- socia ion be ween FDI and s ock ma ke s in ou La in Ame ican coun ies and inds ha FDI and s ock ma ke de elopmen a e posi i ely co ela ed. In he same ein, he indings o Malik and Amjad (2013) also show a posi i e ela ionship be ween FDI and agg ega e ma ke capi alisa ion in Pakis an. In con as , Rhee and Wang (2009) show a nega i e associa ion be ween FDI and s ock ma ke liquidi y in Indonesia. On he ela ionship be ween he ade openness and s ock ma ke de elopmen , some s udies show ha ade openness exe s a posi i e impac on s ock ma ke de elopmen , whe eas o he s ind ha i hu s s ock ma ke de elopmen . In e ms o posi i e ela ionship, heo ies sugges ha ade openness bene i s inancial ma ke de elopmen , including s ock ma ke , in wo di e en ways, which can be desc ibed as “supply-side” and “demand-side” oles (Ni oomand e al., 2014). The o me one s a es ha ade openness is conduci e o he de elopmen o inancial ma ke h ough he supply side o inancial ma ke (see B aun & Radda z, 2005; Rajan & Zingales, 2003). The la e one a gues ha ade openness os e de elopmen o inancial ma ke by aising he demand on inancial se ices and p oduc s (see Newbe y & S igli z, 1984; S ale yd & Vlachos, 2002). In e ms Page 6 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 o nega i e ela ionship, some empi ical s udies such as hose o Jin (2006), Bal agi, Deme iades, and Law (2009), Kim e al. (2011), and Ho (2017) ind ha ade openness indeed inhibi s he de el- opmen o s ock ma ke . The only consensus ha has been eached is he impac s o economic de elopmen and he s ock ma ke liquidi y on he s ock ma ke de elopmen . Wi h espec o he ela ionship be ween eco- nomic de elopmen and s ock ma ke de elopmen , he heo e ical li e a u e in gene al sugges s ha eal income le el and eal income g ow h ha e posi i e impac s on s ock ma ke de elopmen . These models show ha he e is a signi ican ixed cos associa ed wi h he o ma ion o inancial ma ke s, including he s ock ma ke . When he economy de elops, he ela i e impo ance o his ixed cos educes. The e o e, mo e people can pa icipa e in he inancial ma ke (see Boyd & Smi h, 1998; G eenwood & Jo ano ic, 1990; G eenwood & Smi h, 1997). On he empi ical on , he posi i e ela ionship be ween economic g ow h and s ock ma ke de elopmen is well documen ed in he exis ing li e a u e – see, o ins ance, A je and Jo ano ic (1993), Le ine and Ze os (1998), Ga cia and Liu (1999), El-Wassal (2005), Adjasi and Biekpe (2006), Ku ach (2010), Ya ey (2007, 2010), Raza, Jawaid, A shan, and Ka im (2015), Baya (2016), Ho (2017, in p ess). In addi ion, conce ning he e- la ionship be ween s ock ma ke liquidi y and s ock ma ke de elopmen , he e is a conce ed iew ha he liquidi y o s ock ma ke is conduci e o he de elopmen o s ock ma ke . These s udies include hose o Ga cia and Liu (1999), Ben Naceu e al. (2007), Ya ey (2007, 2010), Che i and Gazda (2010), Ku ach (2010), El-Nade and Al aimony (2013), Şük üoğlu and Nalin (2014), and Baya (2016). 4. Me hodology and da a 4.1. ARDL bounds es ing p ocedu e o co-in eg a ion The p esen s udy uses he au o eg essi e dis ibu ed lag (ARDL) bounds es ing p ocedu e sug- ges ed by Pesa an, Shin, and Smi h (1996), Pesa an and Shin (1999), and Pesa an, Shin, and Smi h (2001) o in es iga e he long- un ela ionships be ween he de elopmen o a s ock ma ke and i s se s o mac oeconomic ac o s. This p ocedu e is p e e ed o o he p ocedu es because i does no impose he es ic i e assump ion ha all he a iables being s udied mus be in eg a ed o he same o de . Ins ead, i can be applied o he ime se ies which a e in eg a ed o o de ze o, one, o a mix u e o bo h. In addi ion, while o he co-in eg a ion es s a e sensi i e o he sample size, he ARDL bounds es is sui able e en when he sample size is small (see Pesa an & Shin, 1999; Pesa an e al., 1996, 2001). In his pape , he ARDL bounds es ing p ocedu e employs he equa ion whe e ɛ, γ and δ a e he whi e-noise e o e m, he sho - un coe icien s, and he long- un coe i- cien s o he model, espec i ely, and Δ is he i s di e ence ope a o . In addi ion, deno es ime pe iod and n is he maximum numbe o lags in he model. The a iables, namely lnMCR, lnBNK, ln- INF, lnREERI, lnOPEN and lnTOR, a e he na u al loga i hms o he ma ke capi alisa ion a io, domes- ic c edi o g oss domes ic p oduc (GDP), in la ion a e, eal e ec i e exchange a e index, ade as a pe cen age o GDP and u no e a io, espec i ely. Fu he mo e, he maximum numbe o lags in he model is chosen based on he Schwa z c i e ion (SC). In he i s s age, he null hypo hesis o he no co-in eg a ion ela ionship (1) Δ lnMCR =𝛾0+ n ∑ i=1 𝛾1iΔlnMCR −i+ n ∑ i=0 𝛾2iΔlnBNK −i+ n ∑ i=0 𝛾3iΔlnINF −i+ n ∑ i=0 𝛾4iΔlnREERI −i + n ∑ i=0 𝛾5iΔlnRGDPG −i+ n ∑ i=0 𝛾6iΔlnOPEN −i+ n ∑ i=0 𝛾7iΔlnTOR −i+𝛿1lnMCR −1 +𝛿 2 lnBNK −1 +𝛿 3 lnINF −1 +𝛿 4 lnREERI −1 +𝛿 5 lnRGDPG −1 +𝛿 6 lnOPEN −1 +𝛿 7 lnTOR −1 +𝜀 Page 7 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 is es ed agains he al e na i e hypo hesis o he exis ence o a co-in eg a ion ela ionship F om Equa ion (1), he e a e co-in eg a ing ela ionships be ween he se ies i a leas one o he 𝛿 s is signi ican ly di e en om ze o. The second s age is o conside he F-s a is ic. The e a e wo se s o c i ical alues ha ha e been cons uc ed by Pesa an e al. (2001) unde his null hypo hesis. We do no ejec he null hypo hesis o no co-in eg a ion when he F-s a is ic alls below he lowe - bound alues. Simila ly, we ejec he null hypo hesis o no co-in eg a ion when he calcula ed F- s a is ic is g ea e han he uppe -bound alues. Howe e , when he F-s a is ic alls be ween he lowe and uppe bounds, he es is inconclusi e. I he a iables a e ound o be co-in eg a ed, hen he s udy p oceeds o es ima e he sho - un beha iou o he a iables using an e o -co ec ion model o mula ed as whe e δ is he coe icien o he e o -co ec ion e m, ECM −1. δ is expec ed o ha e a nega i e sign. This implies ha , when he a iables d i apa om he equilib ium le el in he sho un, hey can quickly adjus back o hei equilib ium le els. 4.2. Da a and iden i ica ion o a iables This s udy u ilises qua e ly ime-se ies da a co e ing he pe iod 2001Q4–2016Q4. The co e ing pe- iod in he s udy is solely dic a ed by he da a a ailabili y. The da a ha e been ob ained om di e - en sou ces, including he In e na ional Financial S a is ics o he In e na ional Mone a y Fund (In e na ional Financial S a is ics [IFS, 2017]; and he Wo ld Fede a ion o Exchanges [WFE], 2014, 2017). To assess he mac oeconomic d i e s o s ock ma ke de elopmen , he s udy needs: a meas- u e o s ock ma ke de elopmen and measu es o mac oeconomic a iables. In e ms o s ock ma - ke de elopmen , he s udy uses he ma ke capi alisa ion a io o measu e he de elopmen o he s ock ma ke . This is he alue o lis ed domes ic sha es on he domes ic exchange di ided by GDP. This indica o is used based on he ollowing conside a ions. Fi s , he le el o ma ke capi alisa ion is a desi able indica o which e lec s he abili y o he s ock ma ke in mobilising capi al and di e - si ying isk (Demi güç-Kun & Le ine, 1996). Second, his p oxy has also been widely used o meas- u e s ock ma ke de elopmen in o he empi ical s udies (see, o example, Boyd e al., 2001; Ga cia & Liu, 1999; Şük üoğlu & Nalin, 2014; Ya ey, 2007, 2010). Thi d, despi e he ac ha s ock ma ke is a mul i ace ed concep ha can be measu ed by a ious indica o s, Demi güç-Kun and Le ine (1996) a gue ha all o hese s ock ma ke indica o s a e signi ican ly co ela ed. The e o e, he ma ke capi alisa ion a io is used o measu e s ock ma ke de elopmen in his s udy. Table 1 show he p oxies, sou ces and jus i ica ions o all he a iables used in his s udy. H0: 𝛿 1 =𝛿 2 =𝛿 3 =𝛿 4 =𝛿 5 =𝛿 6 =𝛿 7 = 0 H1: 𝛿 1 ≠𝛿 2 ≠𝛿 3 ≠𝛿 4 ≠𝛿 5 ≠𝛿 6 ≠𝛿 7 ≠ 0 (2) Δ lnMCR =𝛾0+ n ∑ i=1 𝛾1iΔlnMCR −i+ n ∑ i=0 𝛾2iΔlnBNK −i+ n ∑ i=0 𝛾3iΔlnINF −i+ n ∑ i=0 𝛾4iΔlnREERI − i + n ∑ i=0 𝛾5iΔRGDPG −i+ n ∑ i=0 𝛾6iΔlnOPEN −i+ n ∑ i=0 𝛾7iΔlnTOR −i+𝛿ECM −1+𝜀 Page 8 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 5. Empi ical esul s 5.1. Resul s o s a iona i y es s As a p elimina y analysis, and p io o examining he na u e o he ela ionship be ween s ock ma - ke de elopmen and i s se s o mac oeconomic d i e s, he s a iona y p ope ies a e examined. The a iables include he ma ke capi alisa ion a io, domes ic c edi o GDP, he in la ion a e, eal e ec- i e exchange a e index, eal GDP g ow h, alue o expo s and impo s o GDP, and u no e a io. To examine hei s a iona y p ope ies, he s udy uses wo uni oo s es s. They a e he Dickey– Fulle gene alised leas squa es (DF-GLS) es de eloped by Ellio , Ro henbe g, and S ock (1996), and he Pe on (PPURoo ) es de eloped by Pe on (1997). Table 2 shows he esul s o uni oo s es s o he a iables in le els and a he i s di e ences. In Table 2, he esul s show ha a iables such as lnTOR a e s a iona y in le els, while lnMCR, ln- BNK, lnREERI and lnOPEN a e s a iona y a he i s di e ences. Fo he a iables, such as lnINF, and lnRGDPG, he Dickey–Fulle Gene alised Leas Squa es es shows ha hey a e s a iona y in le els, while he Pe on es sugges s ha hey a e s a iona y a i s di e ences. Ha ing es ablished ha he a iables a e in eg a ed o o de ze o [I(0)] o one [I(1)], he s udy can p oceed o es he long- un ela ionships be ween he s ock ma ke de elopmen and i s d i e s using he ARDL bounds es ing p ocedu e. 5.2. Empi ical analysis using he ARDL bounds es ing p ocedu e The esul s o he ARDL bounds es o co-in eg a ion show ha he calcula ed F-s a is ic is 3.586, which is highe han he c i ical alue epo ed by Pesa an e al. (2001) in Table CI (iii) Case III. The e o e, he esul s show ha he a iables used a e co-in eg a ed. See Table 3 o he esul o ARDL bounds es ing o co-in eg a ion, and he c i ical alues o he ARDL bounds es . Ha ing ound ha lnMCR, lnBNK, lnINF, lnREERI, lnRGDPG, lnOPEN and lnTOR a e co-in eg a ed, he s udy es ima es he model using he ARDL bounds es app oach. The i s s ep is o de e mine he op imal lag leng h o he model using he Schwa z c i e ion (SC). The op imal lag leng h selec ed based on SC is ARDL (2, 1, 0, 3, 0, 1, 0). The long- un and sho - un esul s o he model a e epo ed in Table 4. Table 1. P oxies, sou ces and jus i ica ions o he a iables used in his s udy Sou ce: Au ho s’ own compila ion. Va iable P oxy Sou ce Jus i ica ion S ock ma ke de elop- men (MCR) Ma ke capi alisa ion o GDP Au ho s’ calcula ion based on WFE (2014) and IFS (2017) Ga cia and Liu (1999), Boyd e al. (2001), Ya ey (2010), Şük üoğlu and Nalin (2014) Banking sec o de elopmen (BNK) Domes ic c edi o GDP Au ho s’ calcula ion based on IFS (2017) Le ine, Loayza, and Beck (2000), Beck, Demi güç-Kun , and Le ine (2007), Seh awa and Gi i (2016) In la ion a e (INF) Annual pe cen age change o consume p ice index Au ho s’ calcula ion based on IFS (2017) Shan, Mo is, and Sun (2001), Boyd e al. (2001), Ma ques, Fuinhas, and Ma ques (2013) Exchange a e (REERI) Real e ec i e exchange a e index IFS (2017) Cal o, Leide man, and Reinha (1993), Abdalla and Mu inde (1997), Chou (2000) Economic g ow h (RGDPG) Annual pe cen age change in eal GDP Au ho s’ calcula ion based on IFS (2017) Le ine and Ze os (1998), Deb and Mukhe jee (2008), Ca p (2012) T ade openness (OPEN) Sum o expo s and impo s o goods and se ices as a sha e o GDP Au ho s’ calcula ion based on IFS (2017) Rajan and Zingales (2003), El-Wassal (2005), Ni oomand e al. (2014) S ock ma ke liquidi y (TOR) Tu no e a io Au ho s’ calcula ion based on WFE (2014) Ga cia and Liu (1999), Ya ey (2007), Billmeie and Massa (2009) Page 15 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 Huybens, E., & Smi h, B. (1999). In la ion, inancial ma ke s, and long- un eal ac i i y. Jou nal o Mone a y Economics, 43, 283–315. h ps://doi.o g/10.1016/S0304-3932(98)00060-9 IFS. (2017). 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The plo o he cumula i e sum o ecu si e esiduals o he main model. -2 0 -1 0 0 10 20 06 07 08 09 10 11 12 13 14 15 16 CUSUM 5% Signi icance Appendix 1 Page 17 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 Figu e A2(b). The plo o he cumula i e sum o squa es o ecu si e esiduals o he second model. Sou ce: Au ho s’ own compila ion. No e: The s aigh lines ep esen c i ical bounds a 5% signi ican le el. -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 05 06 07 08 09 10 11 12 13 14 15 16 CUSUM o Squa es 5% Signi icance Figu e A2(a). The plo o he cumula i e sum o ecu si e esiduals o he second model. -2 0 -1 0 0 10 20 05 06 07 08 09 10 11 12 13 14 15 16 CUSUM 5% Signi icance Figu e A1(b). The plo o he cumula i e sum o squa es o ecu si e esiduals o he main model. -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 06 07 08 09 10 11 12 13 14 15 16 CUSUM o Squa es 5% Signi icance Page 18 o 18 Ho & Odhiambo, Cogen Economics & Finance (2018), 6: 1451265 h ps://doi.o g/10.1080/23322039.2018.1451265 © 2018 The Au ho (s). This open access a icle is dis ibu ed unde a C ea i e Commons A ibu ion (CC-BY) 4.0 license. You a e ee o: Sha e — copy and edis ibu e he ma e ial in any medium o o ma Adap — emix, ans o m, and build upon he ma e ial o any pu pose, e en comme cially. The licenso canno e oke hese eedoms as long as you ollow he license e ms. Unde he ollowing e ms: A ibu ion — You mus gi e app op ia e c edi , p o ide a link o he license, and indica e i changes we e made. You may do so in any easonable manne , bu no in any way ha sugges s he licenso endo ses you o you use. 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