Banking industry volatility and economic growth

CHAPTER1:INTRODUCTION 1.1 Problemsstatement:...6 1.2 Researchobjectives:...8 1.3 Mainresearchquestions...8 1.4 Structureofthethesis:...9 CHAPTER2: LITERATUREREVIEW...10 2.1Bankingindustr

Thisi s t o c e r t i f y t h a t t h i s t h e s i s e n t i t l e d “ BANKINGI ND US

T RY V O L A T I L I T Y ANDECONOMICGROWTH ”,whichissubmittedb ymei n f u l f i l l m e n t oft h e r e q u i r e m e n t s fort h e d e g r e e ofM a s t e

a n d r esear ch; fortheirpatience,encouragement,eruditeknowledge.Theirexce llentg u i d a n c e encouragedmeinallthetimeofdoingthisstudy.Ihavebeenstriking lyluckytohavesupervisors

whocaredsomuchmythesis,andansweredt o al lmyquestions a n d que ri es p u nc t

u a l l y I c o u l d n o t h a v e i m a g i n e d ha v i n g bettersupervisorsandadvisorsformy research.

r s i n D a t a C e n t e r inUniversityof EconomicandLaw,Dr.LêVănChơn, Dr.TrươngĐăngThụy,lecturerHoàngTrọng,whohelpmesignificantlyin the coursesandthesisw r i t i n g processes.Inaddition,Iwouldliketoexpressmygr eatappreciationtomyfriendsfortheirmotivations.

Lastbutnottheleast;Ioweaveryimportantdebttomyfamilyforgivingbirthto meat thefirstplaceandsupportingmespirituallythroughoutmylife.

HồChíMinhcity,December2015

Therei s g r o w i n g e v i d e n c e fromm u l t i

-s t u d i e -s i n d i c a t i n g t h a t t h e r e a r e l o t -s ofd et e r m i n a n t -s a d v o c a t e t o e conomicg r o w t h However,v e r y fewresearchpapersc o n t r i b u t e tobankingsect or,vitalfieldofmoderneconomy.Itisunclearwhetheriti s appropriatetoassumeanidenti calturningpointinthebankingindustryvolatilitya n d g r o w t h r e l a t i o n d i v i d e d i

n t o acrossi n c o m e c r i t e r i a a n d g e o g r a p h i c a l r e g i o n cr iter ia I n t h i s r e s

e a r c h , w e k e e p i n v e s t i g a t i n g t h e r e l a t i o n s h i p b e t w e e n b a n k i n g volatili tyandeconomicgrowthindetailwaysafterexaminingcarefullythestudiesofM o s h i

r i a n & W u , ( 2 0 1 2 ) ; L i n & H u a n g ,

( 2 0 1 2 ) UsingG M M t e c h n i q u e s f o r dynamicpaneldatatoanalyzeonemaingro upandfivesubsamples:all22economies,11uppermiddleincomeeconomies,11low incomeandlowermiddlei n c o m e economies,8Sub-

SaharanAfricaeconomies,6SouthAsiaandEastAsiaeconomies,5 L a t i n Americ

ae c o n o m i e s , byusingdynamicp a n e l t e c h n i q u e s t o analyzepaneldata Particularly,wepaymoreattentiononthewaycountrycharacteristics,suchastheeffect oflowandhighinflation,WorldwideGovernanceIndicators(WGI)fromtheu p d a t e d d

a t a b a s e o f K a u f m a n n ( 2 0 1 3 ) a n d financialdevelopmentcharacteristicsinfluen cetherelationshipbetweenbankvolatilityandeconomicgrowth.Theq u a r t e r l y

m a (1981,1990)andS c h w e r t (1990)haveprovedthattheeffectoftheuncertaintyofban

kingindustryoneconomicg r o w t h isu n c o r r e l a t e d w i t h t h e effecto f t h e ma rkets t o c k r e t u r n i n

generalo n e c o n o m i c g r o w t h H e n c e , o u r resultsi s moreo n e e v i d e n c

e fort h e relationshipbetweenthestockreturnsofbankandeconomicgrowth.

countrycharacteristics,financialdevelopmentcharacteristics,effectofinflation.

CHAPTER1:INTRODUCTION

1.1 Problemsstatement: 6

1.2 Researchobjectives: 8

1.3 Mainresearchquestions 8

1.4 Structureofthethesis: 9

CHAPTER2: LITERATUREREVIEW 10

2.1Bankingindustryvolatilityandeconomicgrowth 10

2.2.Indicatorsofcountrycharacteristics 12

2.3 Financialindicators andrealactivity 16

2.4 Stockmarketsandeconomicgrowth 17

2.5 Conceptualframework: 19

CHAPTER3:METHODOLOGY,MODELSPECIFICATIONANDDATA 20

3.1 Data 20

3.2 Methodology 27

CHAPTER4:RESULTSANDFINDINGS: 30

4.1 Descriptivestatistics ofvariables: 30

4.2 Econometricresults 33

CHAPTER5:POLICYIMPLICATION,CONCLUSIONANDLIMITATION: 60

4.1 Policyimplicationandconclusion: 60

4.2 Limitationoftheresearch: 62

REFERENCES 64

Tableofempiricalstudiesrelatingtoeconomicgrowthrate: 68

Appendix1:Fullsampleofall22economies 74

Appendix2:11Uppermiddleincomeeconomies 98

Appendix3:11Lowincomeand11lowermiddleincomeeconomies 122

Appendix4:Africaeconomies 146

Appendix5:Asiaeconomies 170

Appendix6:LatinAmericaeconomies 194

1.1Problemsstatement

Veryfewresearchpaperscontributetobankingsector,vitalfieldofmoderneconomy.Itis evidentthatnumerousresearchpapersformanydecades

haveshownfinancialdevelopmenta s importantc h a n n e l f o r economicg r o w t h Ban ksp l a y a c r u c i a l r o l e i n t h e economicg r o w t h ofa c o u n t r y byallocatingf u n

d s amonga l l sectors,p r i m a r y s e c t o r s , s e c o n d a r y sectors,t e r t i a r y s e c t o r ,

e t c Mosto f e x i s t i n g researchesfocuso n performanceoft h e b a n k , l i q u i d l i a

b i l i t i e s t o G D P , marketcapitalizationperGDP,credittoprivatesectorperGDP,et c.asfactorsoffinancialdevelopment.Banksectorplaycrucialroleinsupplyfacilitiest hroughdepositandl e n d i n g , credit,bankingservices,moneytransfer,etc.toec onomicactivities.However,veryfewresearchesmeasuredirectlytheeffectofban kingoperationoneconomicgrowth.Serwa(2010)indicatesthatbankingcrisesc auseoutputgrowtht o slowdown A well-functioning bankingsystemfacilitates infrastructureforothersectorsrunningsmoothly.Therefore, bankingstockreturn willbereflectedinthequality ofbankcredits.AccordingtoBruner&Simms(19 87);Cornell&Shapiro19 86 , themarketforcommercialbanksecuritiesoperatingar eefficientandcontaininformationaboutthequalityofbankloanportfolios.

Therearecloserelationshipbetweenbankstockreturnsandeconomicgrowth.Baseon asset -

pricingtheory,andonmanyresearchesofeconomistsCole,etal(2008);Moshirian& Wu,(2012);Lin&Huang,

(2012),p r o v e thatstockreturnsofbankingindustryreflectingt h e performanceo f t h e b

a n k canp r e d i c t e c o n o m i c g r o w t h I n a d d i t i o n , accordingtotheviewofmark etefficiency,atanypointintime,pricesofsecuritiesinefficientmarketsreflectallknow ninformationavailabletoinvestors.I n o t h e r w o r d s , t h e e x p e c t e d futurecashf l

o w s oft h e banksa r e reflectedi n t h e presentstockprice.Thisdependsonefficiencyof loanprojects.Bankstockreturnsw i l l reflecttheefficiencyofthemarketinusingfunds toinvestment.Furthermore,i n mostofcountries,commercialbanks,PLCs,arebroad lyrepresentativeofcountry’sb a n k i n g s e c t o r sincet h e y accountf o r v e r y h i g h positionint h e w h o l e b a n k i n g system.

Consequently,therearecorrelationbetweenbankstockreturnsandfutureeconomicgrowth.

InsomeresearchofCornett(2010)andNaceurandGhazouani(2007),institutionalframe work,s u c h a s c o u n t r y s p e c i f i c , f i n a n c i a l s y s t e m i n d i c a t o r s alsoh a v

e significantinfluenceonbankingoperations.Moreover,intheinvestigationofAsan te,S , A g y a p o n g , D , & A d a m , A M.

( 2 0 1 1 ) , c o u n t r y c h a r a c t e r i s t i c s h e l p banksoperatesmoothlyaswellasi mprovetheirservices.Thispromoteseconomicg r o w t h significantly.Intheindicato rsrepresentativecountryspecific,thenegativee f f e c t s o f i n f l a t i o n h a v e been

s t u d i e d i n a l o t o f modelso f e c o n o m i c g r o w t h , i t u n d e r m i n e s theconfidenc eofdomesticandforeigninvestorsaswellasconsumersa b o u t t h e futuree c o n o m i

Accordingtothepointofviewthatbankingoperationcontainsinformationabou tperformancesofalo t ofsectorsreflectingthe healthoftheeconomy( c o l e , etal, 2 0

0 8 ; Moshirian&Wu,2012;Lin&Huang,2012).Itisindicatethattherelationship betweenbankingindustryvolatilityandeconomicgrowththatisindependentoft h e informationc o n t a i n e d b y o v e r a l l marketreturns.Since thev o l a t i l i t y ofthebankrelatetothevariationofstockreturnsofthebankingindustr ywhichrefert o e a c h i n d i v i d u a l b a n k Therefore,t h i s i n f o r m a t i o n shouldb e i ndependentofinformationbeingreflectedinmarketexcessreturnswhichisrepresentat ivef o r t h e w h o l e p u b l i c limitedc o m p a n y (PLCs)i n t h e stockm a r k e t (Oshirian a& 2 0 1 2 ; L i n & H u a n g 2 0 1 2 ) Similarly,Naceur& G h a z o u a n i ( 2 0 0 7 ) i n d i c

a t e thattheimpactofequitymarketongrowthisindependenttotheimpactofb a n k deve lopmento n g r o w t h P u b l i c l y t r a d e d b a n k s a l s o a c c o u n t forh i g h proporti oninthewhole,thisleadtobankingindustrystockreturnswillrepresentforthe wholebankingsectorinthemostofcountries.

Intheresearchesonbankingindustryvolatilityandeconomicgrowthtopic.Mos hirian&Wu,(2012),theinvestigatorsconcentratemoreoncountryclassified

S a h a r a n Africag r o u p , 6 S o u t h Asiaa n d E a s t A s i a g r o u p , 5 L a t i n America Theextremevolatilityofbankingindustrystockshastriggedfortheconfusioninfi nanceperformancea n d t h e e c o n o m i c c r i s i s aftert h a t A l l t h e c o m p o n e

n t s ofv o l a t i l i t y includingfirmvolatility,industryvolatility,marketingvolati lityarecountercyclicalandtendtoleadvariationinGDP(Campell,2001).Inthisstudy,weke epi n v e s t i g a t i n g t h e u n c e r t a i n t y o f b a n k s t o c k p r i c e i n t h e r e l

a t i o n w i t h t h e marketsbehavingerraticallyinthefinancialmarketsaswellasinecono micgrowth.Wealsos u r v e y t h e effecto f l o w a n d h i g h inflationo n economicg r o w

t h i n t h e interactionwithbankingvolatility.Thirdly,weexaminetheeffectofcountryc haracteristics,whichisWorldwideGovernance Indicators,andfinancialdevelo pmentvariablesimpactontherelationshipbetweenbankvolatilityandfutureeconomicgro wthr at e B y doingt h i s research,w e h o p e to fillt h e gapof p r e s e n t researches,andc ontributesomesmallfindingstotheseeconomies.

1.3 Mainresearchquestion:

- Isthereanyrelationshipbetweenbankingindustryvolatilityandeconomicgrowthi n selec tedsamples?

- Whetherc o u n t r y c h a r a c t e r i s t i c s a n d financiald e v e l o p m e n t c h a

r a c t e r i s t i c s strengthenorweakentherelationshipbetweenbankvolatilityandecono micgrowthi n selectedsamples?

1.4 Structureofthethesis:

AfterthefinishofChapter1,therestofthisthesiswillbecategorizedasfollowingchapter: Chapter2 i n t r o d u c e b a n k i n g i n d u s t r y v o l a t i l i t y a n d economicg r o w t

h , f i n a n c i a l i n d i c a t o r s andrealactivity,indicatorsofcountrycharacteristics, stockmarketsandeconomicgrowth,relevantliteraturereviewsoftheserelationships

Thischaptershowsoutsomeappropriatedefinitionsofbankingindustryvolatility,i n

d i c a t o r s ofcountrycharacteristics,suchasVoiceandAccountability,Freeelecti on,P o l i t i c a l S t a b i l i t y a n d AbsenceofV i o l e n c e , G o v e r n m e n t Effectiveness ,R e g u l a t o r y Q u a l i t y , R u l e o f L a w , h i g h i n f l a t i o n , l o w i n f l a t i o

anya s s e t toitsfuturedividend,andthusi n co r p o r a t e way toestimateth e timeand ri skinassetv alu at ion,prov e th at stockr e t u r n s ofbankingindustryreflectingtheperfo rmanceofthebankcanpredictfutureeconomicgrowth.

Ina d d i t i o n , accordingtoTheEfficientmarkethypothesis(EMH),thev i e w o f mar ketefficiency,shareprices always beingtradedattheir fairvalueincorporate a

n d reflectal l relevantinformationi n the market.At any point i n time,pr i ces ofsecuri tiesinefficientmarketsreflectallknowninformationavailabletoinvestors.T o bemo reclearly,theexpectedfuturecashflowsofthebanksarereflectedinthepresentstockpric e.Thisdependsonefficiencyofloanprojects.Bankstockreturnsw i l l reflecttheefficie ncyofthemarketinusingfundstoinvestment.Furthermore,i n mostofcountries,com mercialbanks,PLCs,arebroadlyrepresentativeofcountry’sb a n k i n g s e c t o r sinc

et h e y a c c o untf o r v e r y h i g h positionint h e w h o l e b a n k i n g system.Conseque ntly,therearecorrelationbetweenbankstockreturnsandfutureeconomicgrowth

Theg l o b a l financialc r i s i s l a u n c h e d f i r s t l y i n t h e U S spreadt o financialm a r k e t

ChiefFinancialO f f i c e r s i n American.T h e y i n d i c a t e t h a t firmsd o n o t h a v

e a b i l i t y t o b o r r o w externallyduringthecreditcrisisof2008.Thisleadsthemt ofailtocatchinvestmento p p o r t u n i t i e s , w i t h 8 6 % o f c o n s t r a i n e d U S I

n short,t h e weakenedfunctionofbankingsystemcausenegativeeffectontheflowofecono micactivities.T h i s financialshockmaycause veryhighinflationrate ineconomiessurveyedaftert h a t , andhighinterestratesimultaneously.

IntheresearchonBankingindustryvolatilityandgrowtho f Pei-Chien Chuan(River)Huang,2012.TheyuseIndustry,Country

Lin,Ho-ExternalFinance,BankDevelopment,VolatilityofBankDevelopment,StockMarke tDevelopment,VolatilityofStockMarketDevelopmentasindependentv a r i a b l e s by difference-in-differenceframeworkofRajanandZingales(1998)tothecross-

country,thisstudycover19yearsfrom1980to1999fordevelopedcountriesa n d middlei ncomecountries.Theyshowsthatbanking-industry-

volatility,estimateda s t h e s t a n d a r d d e v i a t i o n oft h e g r o w t h ofprivatecredit,effe cto n t h e g r o w t h o f i n d u s t r i e s n e g a t i v e l y t h a t a r e m o r e e x t e r n a

l l y f i n a n c i a l l y d e p e n d e n t However,thedetrimentalgrowtheffectofbankin gsectorvolatilitydisappearswhenthesamplei s r e s t r i c t e d t o t h e r e l a t i v e l y p l a c

i d 1 9 8 0 C o m p a r e d t o t h e 1980s,t h e 1990sarec h a r a c t e r i z e d b y a m o r e e c o

n o m i c a l l y i n t e g r a t e d w o r l d accompaniedbymoreoftenunpredictedfinancialcris esthatdisturbthebankingsector.Assuch,thisresultsi m p l y t h a t i n a moreeconomic allyi n t e g r a t e d w o r l d , t h e s t a b i l i t y o f b a n k developmentmayb e importa ntt o l o n g -

r u n g r o w t h O n t h e o t h e r h a n d , b a n k i n g industryinstabilityrelatetomarke tperformancewherecontaintheeconomyfigures.Theuncertaintytendstodecreas easthestockmarketrisesoroutputgrowsu p andinclineasthestockmarketdepressoro

utputslump(Crestmont,2011).FortheresearchofFariborzMoshirianaandQiongb ingWu,2012whentheyuseOLSdifferenceGMMandSystermGMMtechniquetos urveyinonefullsampleof36developedcountries,andtwosubsamplesof18developede conomies,18emerging

returnsandfutureeconomicgrowthtobepositivean volatilityandfutureeconomic growthnegative moretremendouslyHowever,govern mentownershipreducet h e s e relation.Incontrast, t h e enforcemento f theinsider- tradinglawincreasethefirstrelationpositively anddeclinethesecond relationnegat ively.Thethree indicatorso f financiald evelopmentstrengthent h e firstrelationand impactambiguously onthesecond

dmaketherelationshipofbank-2.2.Indicatorsofcountrycharacteristics

In theresearchof Cornett,2010,institutionalframeworkalsohas significantimpacto n bankingsystem.Tobemoredetail,

politicalbureaucratsweakentheperformanceo f ownedbanksnormallyrunlessprofitably,heldlesscorecapital,andcontainedgreaterc reditriskthanprivate-

state-ownedbanks,andthestate-ownedbanks.Moreover,N a c e u r a n d Ghazouani( 2 0 0 7 ) , w h o useP a n e l d a t a w i

t h G M M estimationsw h e n survey1 1 MENAc o u n t r i e s p r o v e t h a t t h e i m p

a c t o f e q u i t y

-marketongrowthisindependenttotheimpactofbankdevelopmentongrowth,andF i n a n c i

a ld e v e lo p m e n t keepunimportantroleforeconomicgrowth.Thisweakrelationshipis harmfulfort h e e c o n o m y Besides,t h e r e isn e g a t i v e relationshipbetweenbank -

developmentandeconomicgrowthinconditionofcontrollingforthestockmarketde velopmentsinceunwell-

bankdevelopmentandeconomicgrowth negativeincondition ofcontrollingforthestockmarketdevelopmentsinceunwell-

functioningfinancialsystemaswellaspoorinstitutionalenvironment.Besides,insomeres earch(Perez,etal.,2015;Filippidis,e t a l , 2 0 1 4 ; Cole,e t a l , 2 0 0 8 ) t e l l u s t h

e sameresultt h a t u n

-w e l l financialenvironmentharmsthebankingsectordevelopment.Thisdependsonspe cificstructurea s w e l l a s i n s t i t u t i o n a l f r a m e w o r k i n eachcountry.Furthermore,i

n t h e investigateofA s a n t e , S , Agyapong,D , & Adam,A M.

( 2 0 1 1 ) w h e n t h e y usemarketcapitalization,bankcompetition,Domesticbankcredita spercentofGDPasindependentvariablestocoverthe studyin17yearsfrom1992to2009 inGhanabyA u t o r e g r e s s i v e DistributedLag(ARDL)andDynamicOLS(DOLS) method.Thisresearchp r o v e t h a t b a n k i n g institutionalc h a r a c t e r i s t i c , b a n k

i n g c o m p e t i t i o n a n d stockmarketd e v e l o p m e n t makesmoothingo p e r a t i o n , improvings e r v i c e s int h e banks.Thisaffectseconomicgrowthpositivelyasaresults.

Themacroeconomicstheoryhaslongdiscussedthecausalitybetweeninflationandecon omicg r o w t h foro v e r h a l f c e n t u r y T o bemoreclearly,P h i l i p s modela n d Ke ynessian’viewstatedthattherearestrongrelationshipbetweeneconomicgrowtha n d infla tionr a t e i n e v e r y country.T h e y h a v e positivel i n k i n t h e caseofh i g h inflations hifttheaggregatedemandtotheright.Conversely,ifhighrateininflationshifta g g r e g a t e demandt o t h e l e f t , t h i s r e l a t i o n i s negative.Thesec i r c u m s t a n c e presentint hecaseofmonopolisticpricing,widevolatilityinexchangerate,ortheshocksinin put supply.Thismeanth at the economicwi llsufferdifficulty.Especially,itmaygethig

wheninflationrateishigherthan2-3p e r c e n t AccordingtoBruno,M.,&Easterly,W.

(1998),theseparatethehighgradei n theinflationrate(thegradeatwhichtheinflationrateexc eedcalculatedthresholdi s estimated40percentyearly)weaken thepreviousresearc hresultsandgiveouto n e newexploration.Thatisthehighgradeininflationharmthe economicgrowth,a n d otherwise,thelowgradeininflationboosttheeconomicinonec ountry.Thesevariablesh a v e n e g a t i v e relationship,e s p e c i a l l y i n t h e l o n g stag

ei s s u p p o r t e d b y A n d r é s &Hernando,(1999).

Thesustainableincreaseinlivingstandardforacountrymeansalargervoiceontheworldsta ge.T h e r e a r e a l o t o f measuresoft h e q u a l i t y of g o v e r n a n c e h av e b e e n b u i l t t o evaluateo f t h e q u a l i t y ofg o v e r n a n c e , a m o n g t h e s e a r e t h e WorldwideG

o v e r n a n c e Indicators,sixinstitutional variablesrank countries ons i x asp ectsofg o o d governance(Kaufmann2013).Theeffectofgovernancequalityonecono micperformanceissupportedbyKong,T(2011).Miyazawa,I.,&Zusman,E.

(2015)p r o v e thatgovernmenteffectiveness andruleoflawhavesubstantively andstatistical ly significanteffectsonprogresscountries,controlofcorruptionhaspos itivecor relation s wi t h the governmenteffectiveness.Ho wever, v o i c e andaccoun tability”and“controlofcorruption”donothavethesignificant effectsonactivities ofonecoun try In con trast ,Kaufmann,D., Kraay,A.,& Mastruzzi,M.

( 2 0 1 0 ) arguethatconstructvalidityisnotausefultooltoassessthemeritsofth

eW G I InotherresearchpaperofOmoteso,K.,&IsholaMobolaji,H.

(2014).Authorevidenceoutdifferenceresults,politicalstabilityandregulatoryvariablesim pactoneconomicg r o w t h i n t h e s e p a r a t e r e g i o n ( S u b -

s a h a r a n A f i c a ) p o s i t i v e l y a n d significantly,thisismorestronglyforthevariables ofvoiceandaccountabilityandr u l e oflaw,butgovernmenteffectivenesshavenegativei mpact.

Voice_and_Accountability:“Thev a r i a b l e m e a s u r e t h e d e g r e e t o w h i c h t h e i r c

i t i z e n s maypr es en t i n electionfora u t h o r i t i e s i n o n e country,freedomofvo i ce, freemedia”.Free_media,freedomofexpressionmitigatetheasymmetricinformationpr oblem.Incontrolledmediacountries,rumorshaveconsiderableinfluenceonthe financi al-

market.Thusfree_mediapartially weaken th e effectofb a n k i n g i n d u s t r y v

o l a t i l i t y o n e c o n o m i c g r o w t h F r e e _ e l e c t i o n , freedomofassociationa

onpoliticalp o w e r a n d preventg o v e r n m e n t officials,i n t e r e s t g r o u p s fromi m p

l e m e n t i n g distortionarymacroeconomicpoliciesthatmakethecountrymorevulne rable.Free_election,freemediahelpconstrainpoliticians.Thusfreeelectionweakent heeffectofbankingindustryvolatilityoneconomicgrowth.

Political_StabilityandAbsence_of_Violence:“Thevariablemeasureperceptionsofthel ikelihoodthatthegovernmentwillbedestabilizedbyunconstitutionalorv i o l e n t m e a

n s , includingpolitically_motivatedviolenceandterrorism”.Po l it ic a l _ st a b il i ty

a n d a b s e n c e _ o f _ v i o l e n c e mayl e a d t o l e s s volatilityi n p o l i c i e s

towardb u s i n e s s e s ( b a n k i n g a n d n o n

-b a n k i n g ) i n t h e future,l e s s v o l a t i l i t y i n t h e economy.Itislesslikelytoleadtoca pitalflightorpanicsellingofcurrency.ThusP o l i t i c a l StabilityandAbsenceofVi olenceweakentheeffectofbankingindustryv o l a t i l i t y oneconomicgrowth Government_Effectiveness:“Thevariablemeasurethepublicqualityinservingitscitiz ens,andtheextentofitsindependence,thepolicyquality,andthecommitmento f

occurinthereallife.Themoreeffectiveness,thelessvu ln er ab i li t y offinancialf i e l d ”

A h i g h e r l e v e l of qu al i ty ofp ub li c s e r v i c es , h i g h e r degreeofitsdependencefr ompoliticalpressure,therewillbelessvolatilityi n t h e governmentc o n d u c t o f econ omicp o l i c i e s /

a c t i v i t i e s T h e f i n a n c i a l marketmayb e l e s s v u l n e r a b l e t o p a n i c a n

d h e r d i n g Thus,G o v e r n m e n t Effectivenessweakentheeffectofbankingindustr yvolatilityoneconomicgrowth

Regulatory_Quality:“Thev a r i a b l e measuret h e a b i l i t y o f a u t h o r i t i e s t o maket h

e r e g u l a t i o n s feasibleandimprovethe

privatefield”.Inemergingmarketeconomies,t h e o p e r a t i o n ofstate owned firmsisnormallyinefficiency.Thisaffectsoutcomeoft h e economynegatively.Soundpo liciesenhancingprivatesectordevelopmentw o u l d boosteconomicperformanceofade velopingeconomy,improveconfidencei n t h e financialm a r k e t T h u s R e g u l a

t o r y Q u a l i t y w e a k e n t h e effecto f b a n k i n g industryvolatilityoneconomicgro wth

Rule_of_Law: “Thevar iable measurethe degr ee towhich gover nmentmakethe

q u a l i t y ofpolicy,c o u r t s , crimel a w s , v i o l e n c e , enforcemento f c o n t r a c t , p r o

p e r t y r i g h t s f e a s i b l e ” H i g h e r confidencel e v e l i n t h e l a w s y s t e m isf o

r m e d f r o m t h e h i g h e r g r a d e o f R u l e _ o f _ L a w , effectivec o n t r a c t enforce ment,f a i r a n d impartialc o u r t , protectionofpropertyright.Highergradeofthisvaria blestrengthenstrustinth e economy.Thiscontributeinsignificantlytovolatilityinf inancialmarket.ThusRuleofLawweakentheeffectofbankingindustryvolatilityoneconomi cgrowth

Control_of_Corruption:“Thevariablemeasurethedegreetowhichauthoritiescarryo u t p o

w e r t o p u b l i c ”.Economica c t i v i t i e s , sucha s i m p o r t /

e x p o r t activities,manufacturingactivities,governmentactivitiestobankingacti vities,areimpacteds e r i o u s l y byc o r r u p t i o n , fromt h a t mayd e c l i n e t h e e f f

i c i e n c y ofeconomicperformance.Highlevelofcorruptionmaycauseinefficienciesandmi sallocationof

resourcesrunningup topooreconomicoutcome.Economygetvulnerable tocapitalflighte a s i l y becauseofg e t t i n g stucki n e co n o m i c p e r f o r ma n c e Th u s , Controlo f Corruptionweakentheeffectofbankingindustryvolatilityoneconomicgrowth.

increaseịnquality,quantityandefficiencyoffinancialsystem.Thisperformanceinvolv estheconnectionofmanyactivitiesandinstitutions.Financialinstruments,marketsa n d

i n t e r m e d i a r i e s p e r f o r m moree f f i c i e n c y m a k e f i n a n c i a l s y s t e m d e

v e l o p , t h e n t h e y affectt h e information,enforcementandtransactioncosts(Levine,20 05).Therefore,financialdevelopmentcomprisetheenhancement inallocatingresource ,mon i to ri ng investment,mobilizingsaving,diversifyingandmanagingrisk.Further

Threeindicatorsrepresentforthedevelopmentoffinancialsystem:(1) Creditt o p r i v a t e field,( 2 ) Liquid-Liabilities(M3)a s % ofG D P ,

Domestic( 3 ) t h e r a t i o o f S t o c k M a r k e t

-C a p i t a l i z a t i o n toGDP.Firstly,financialresourcesmostlyofc o r p o r a t i o n s are fundedtoprivatefieldinthewayofloans,non-

equitysecurities,c r e d i t s Credittoprivatefield.Secondly,theratioofLiquid-

forcommercial,accountsreceivable.TheseformDomestic-LiabilitiesinfinancialsystemtoGDP.M0(thet o t a l v a l u e o f c u r r e n c y a n d dep ositi n t h e c e n t r a l b a n k ) p l u s M1( d e p o s i t s a n d electroniccurrency)p l u s M2(timea n d s a v i n g s d e p o s i t e s a n d o t h e r depositfortransferableforeigncurre ncy,certificatesaswellassecuritiesrepurchase

agreements)p l u s c h e c k s fort r a v e l e r s , paperf o r trades,timed e p o s i t s forforeign currency,andshareoffundsforth e market.It implies thatthedepth of financialinter mediariesispositivelyrelatedtotheprovisionoffinancialservices;thestockmarketc

o n t r i b u t e s s i g n i f i c a n t l y to t h e developmento f f i n a n c i a l sectorsa n d economic growth(Pagano,1993).Theappearanceofstockmarketcanhelpinvestorsholding financialportfoliotoreducetransactioncostsanddiversifytheirrisks.S i n c e risk diversificationi n c e n t i v e s i n v e s t o r s t o h o l d m o r e t h e i r i n d i v i d u a l assetsi n p r

o d u c t i v e c a p i t a l , i t i s benefitt o b o o s t t h e e c o n o m i c growth.F o r t h i s reaso n,t h e l a s t i n d i c a t o r , w h i c h isalsou s e d t o measuret h e d e p t h o f f i n a n c i

a l development,istheratio ofstockmarketcap i t al i zat i on toGDP(s to ck _ cap ) (Jun,2 0 1 2 ; Levine&Zervos,1996;Ndlovu,2013;Wuetal.,2010).Itequalst hetotalvalu e ofalllistedsharesinastockmarketasapercentageofGDP.

2.4 Stockmarketsandeconomicgrowth

Forthedevelopingcountries,intheresearchofWang&Ajit(2013)usingunitroottestandt hecointegrationframworkprovethatstockmarketdoesnotaffecteconomicgrowth positiveinChina,thisresultfitwiththereportofHarris(1997)ford ev el o p i n g c o

u n t r i es ifthe s t o c k marketi s m a i n l y ana d m i n i s t r a t i v el y d r i v e n market.Osam wonyietal.,

(2013),authorsfindforGhanaandNigeria,thereisnocausalrelationship b et we

en stockmarketd ev el op men t andeco nomicgrowth,but t h e y haveabidirectio nalcausalrelationshipwhentheyuseGrangerCausalitytestprocedureasdevelop edinGranger.ThisreportisthesametoRahimzadeh,Farzad( 2 0 1 2 ) usingdatarelate dtotheMiddleEastandNorthAfricaintheperiod1990-

2 0 1 1 Incontrast,inthesampleof35developingeconomies,Cooray.A,

(2010)theempiricalf i n d i n g s o f t h e s t u d y showt h a t p o l i c y measurest a k e n t o increaset h e o u t p u t , liquidityandactivityofthestockmarketwillfurtherincreaseoutputg rowth.

Inthestudyabouttherelationamongbanks,stockmarketsandeconomicgrowthofKim,D.

&Lin,S.

(2013)whodemonstratethattheinteractionofeachofthethreev a r i a b l e s isinimport antways.Whilebothcontaininformationaboutoutputgrowth,b a n k i n g developmentcon tributemoreforgrowthinlow-

incomecountriesandstockmarketdevelopmentismorecontributionforoutputgrowthinh igh-incomeorlow-

inflationcountries.Theauthorsexplorecoexistenceofapositiveeffectofbanking

developmento nstockmarketd ev e l o p me n t anda negativeeffectofst o ck mar k et dev elopmentonbankingdevelopment.Inaddition,theyalsofindtheevidencefort h e f e

e d b a c k e f f e c t s ofg r o w t h o n b o t h b a n k i n g a n d stockmarketd e v e l o p m e n

t Moreover,Rabiul(2010)usingGeneralized MethodofMoments(GMM)torese archsampleof80 developingc o u n t r i e s s p a n n i n g fromt h e p er i o d o f 1 9 7 3 t o 2 0 0

2 provethatbanksandstockmarketshavepositiveimpactsoneconomicgrowthseparatelyan dpositively,theyareimportanttoboostlong-rungrowthindevelopingcountries.In

addition,authoralsoindicatestherelationbetweenfinanceandgrowthi s non-linear.In otherwords,financialdevelopmentismorebeneficialforcountriesdevelopingfromavery lowstage;howeverthemarginalbenefittorichcountriesislessthanforlowincomecountrie sduetodiminishingmarginalreturns.

Banking volatility ( - ) Domestic Credit to Private Sector Performance of bank

(+)

Liquid Liabilities (+) Moshiriana and Wu, 2012

Lin and Huang, 2012Financial development

Stock Market Capitalization

(+)

Voice and Accountability (Ambiguous)

Political Stability and

Absence of Violence (+)

Economic Growth

Government Effectiveness (Ambiguous)

Regulatory Quality (+)

Country characteristics (+)

Rule of Law Control of Curruption (+)

(+) (-)

Inflation 1 Inflation 2

Oshiriana & 2012; Lin & Huang 2012Market excess returns (Ambiguous)

2.5 Conceptualframework

CHAPTER3:METHODOLOGY,MODELSPECIFICATIONANDDAT A

Inprevioussections,the

impactofbankingvolatility,bankingexcessreturn,marketexcessr e t u r n , c o u n t r y specif ics,financiald ev e l o p m e n t h a v e beeni n t r o d u c e d a n d discussedwiththepurposei sthatthereaderswillhaveoverlookonfactorsimpactingonGDPgrowthrate.Thiss ections h o ws outsomefollowingissue: (1)d a t a andsamplesize,

(2)methodologyemployed.

3.1 Data

Thedatasetsincludeinformationinincomecriteriaandgeographicalregioncriteriab y resear chingindetail in on e mainsampleandfivesubsamples:all22markets,a n d 1 1 u p

p e r middlei n c o m e markets,1 1 l o w incomea n d l o w e r middlei n c o m e markets,8

S u b

-S a h a r a n A f r i c a markets,6 -S o u t h A s i a a n d EastA s i a markets,5 L a t i n Ameri camarketsassubsamplesovertheperiodfrom2003to2014inquarterdata,w i t h t h e l o n

g e s t times e r i e s b e i n g 1 1 yearsa n d t h e s h o r t e s t 0 2 y e a r s T h e samplep e r i o

d fore a c h marketisshowni n column4 o f T a b l e ( 3 ) T h e s e l e c t e d economies’d a t

a i s b a s e d o n t h e a v a i l a b l e datao n b a n k _ e q u i t y _ p r i c e , q u a r t e r l y macro economictimeseriesandshort_terminterestrates.Table(1)summaryv a r i a b l e c alculatedandtheirsources.

aremanywaytoestimatet h e volatilityofthebank.However,

inthisstudy,themorecorrectway

isappliedindetail ThatisadisaggregateapproachbaseonthemethodofCampelletal(2 001)t o calculatethebankingvolatilityvariable,wecarryoutinsomesteps.Firstofall,

w e calculatetheportfoliooflistedbanksforeachmarketcollectinginInternationalDatas treamsources.BasingonavailableMarketpricedata,themaximumnumbero f 30liste dbanksforIndonesia,andtheminimumof2forMauritiusandUganda.Nevertheless,wh encollectingavailableMarketCapitaldata,wehavethemaximumnumberof30listedban ksforIndonesiaandtheminimumof1forPhilippines.Int h i s case,Philippineshas completedatasetofmarketpriceof19banks,quarterlyG DPseriesandshort-

terminterestrates.However,ithasmarketcapitalfor1listedbanksinthe Datastreambankingsector,sothe sample isanalyzedon available data

intheseindi cato rs ofindiv idual b ank s S i n c e all2 2 countri es have marketec onomies,w e o n l y c o l l e c t availableb a n k s ondomestics t o c k e x c h a n g e m a r k e t

T h e banksrunningindomesticmar k et andinforeignmarkets,butlistedinstocke xchangem a r k e t a b r o a d excludei n o u r sample.T h e r e f o r e , fewb a n k s c a n repr esentativeforthewholemarket.Thesevariable,theinterestrates,GDPseriesa n d themarketpriceindexforeachcountryalsoareextractedfromDatastream.Thesourcesofrese archingd at a collected isdiversity.Table(1)summary informationa b o u t varia blescalculated inthisresearch.Withthepurposeofprolongthe time-

sensetosimplifyforourassumptiona n d runningthesamemodelfordifferenteconomiesint hemostconsistentway.

Afterallaboveprocess,wehavecompletedatasetson22economies.Wedividethepaneldatai ntoonemainsampleandfivesubsamples:all22markets,and11uppermiddlei n c o m e

g r o u p , 1 1 l o w incomea n d l o w e r middleincomegroup,8 S u b

-S a h a r a n Africagroup,6-SouthAsiaandEastAsiagroup,5LatinAmericagroupassubs

amples.WefollowthethresholdlevelsofGNIpercapitaarethosecalculatedb y t h e WorldBanki n 2 0 1 2 Countriesw i t h l e s s t h a n $ 1 , 0 3 5 G N I p e r capitaa r e b e l o n

g t o l o w

-i n c o m e c o u n t r y g r o u p , t h o s e w -i t h between$ 1 , 0 3 6 a n d $ 4 , 0 8 5 a s lowe rmiddlei n c o m e c o u n t r y g r o u p , t h o s e w i t h between$ 4 , 0 8 6 a n d $ 1 2 , 6 1 5 a s

12weeks,asaresultwehavetheexcess-(2008),mostofv a r i a b l e s i s estimated.Thesea r e c o n t i n u o u s realg r o w t h r a t e ( G r o w t h ) , w h i c h makeu p d e p e n d e n t v a r i a b l e , l a g g e d E x c e s s -

R e t u r n oft h e market(Rm),whichisc o n t r o l l e d v a r i a b l e , t h e c h a r a c t e

r i s t i c s ofeachcountry,w h i c h a r e sixg o v e r n a n c e i n d i c a t o r s , lowinflatio n,h i g h i n f l a t i o n , a n d i n d i c a t o r s

o f f i n a n c i a l development,whicharedomesticcredittoprivatesector,liquidliabilities Theindicatorspresentingcharacteristicsofeachcountryrelatetoeconomicgrowtho r t h

e e f f i c i e n c y oft h e e c o n o m y i n o n e c o u n t r y i n l o n g s t a g e T h e s e i n

d i c t o r s respectthedifferenceinthe

crosssectionininstitutionalframeworkofonecountry.Next,w e estimatet h e effecto f t h

e d i f f e r e n c e s i n i n s t i t u t i o n a l frameworko f o n e c o u n t r y ontherelationshipbet weenbakingindustryvolatilityandeconomicgrowthr a t e

- Thebankingindustryvolatility(primaryvariable)isexpectedtocreatenegative effectongrowth(Pei-ChienLin,Ho-

ChuanHuang,2012;FariborzMoshirianaandQ i o n g b i n g Wu,2012)

- ThedependentvariableisGDPgrowthrate(Growth).Itiscalculatedbytaki nglogarit oftheratioofGDPatperiodtandGDPatperiodt-

1attheconstantprices( Growth=LOG(GDPt/GDPt-1))

- Thec o n t r o l v a r i a b l e isl a g g e d markete x c e s s r e t u r n I t i s defineda s t h e e x c e

s s r e t u r n

onthemarketindexincountry-i.Itisestimatedbytakinglogaritoftheratioo f marketpriceindexattheendofperiodtand marketpriceindexatperiodt-1ofc o u n t r y i,tisinquarter,thenminustherisk- freerate(Rf),whichisTreasury-Billr a t e i n t h r e e montho r d ep o s i t -

r a t e i n t h r e e m o n t h T o compromiset h e empiricalresults,t h e impacte x p e c t e d directiona m b i g u o u s i s i n d i c a t e d byWang& A j i t ( 2 0 1 3 ) , Harris(1997), Osamwonyietal.,(2013),Rahimzadeh,Farzad(2012),Cooray.A,(2010)

( Rm=Rmit=log(Pmit/Pmi(t-1)-Rfit ))

Eightcountrycharacteristicindicators:

SixWorldwideGovernanceIndicators(WGI),theyaredatasetcoversomequalifyi

n d i c a t o r s presentedthehealthofGovernmentovertheworld.Theyrangeinunits froma r o u n d -

2 5 t o 2 5 , w i t h h i g h e r v a l u e correspondingt o b e t t e r g o v e r n a n c e o u

soweusetheoverlappingannualdatawithquarterlyobservationstoprolongthetime-series -

Voice_and_Accountability:T h i s v ar i ab l e d o n o t h av et h e significanteffectso nacti vitiesofo n e c o u n t r y (Miyazawa,I , & Zusman,E , 2 0 1 5 ) Buti n o n e o f t h e resear chofOmoteso,K , & IsholaM o b o l a j i , H

( 2 0 1 4 ) , t h e y e v i d e n c e t h a t t h i s indicatora n d economicg r o w t h h a s positiv

er e l a t i o n s h i p forS u b - s a h a r a n Africar e g i o n

- Political_StabilityandAbsence_of_Violence:Itisexpectedtoboosttheeconomya n d weakentheeffectofbankingindustryvolatilityoneconomicgrowth.

- Government_Effectiveness:Ithaspositivelyandstatisticallysignificanteffectsonprogress countries(Miyazawa, I.,&Zusman,E.2015),butthisisnegativeinthe

researcho f O m o t e s o , K , & I s h o l a M o b o l a j i , H ( 2 0 1 4 )

forSub-saharanA f r i c a region.

- Regulatory_Quality:Itisexpectedtoimprovetheeconomyandweakentheeffecto f ban kingindustryvolatilityoneconomicgrowth

- Rule_of_Law:I t h a s p o s i t i v e l y a n d s t a t i s t i c a l l y significanteffectso n pro gressc o u n t r i e s (Miyazawa,I.,&Zusman,E,2015).Itisexpectedtoweakentheeffect ofb a n k i n g industryvolatilityoneconomicgrowth

- Control_of_Corruption:It hasp o s i t i v e correlationsw i t h

t h e governmente f f e c t i v e n e s s (Miyazawa,I.,&Zusman,E,2015)

- Inflation(1)isthedummyvariable,i t t a k e s o n t h e v a l u e o f o n e w h e n t h e va lu

e ofinflationissmallerthanthesamplegroup(alleconomies)medianandav a l u e ofz eroot h er wis e T h e d at ai s inannualformat,s o we useth e o v e r l a p p i n g annualdata withquarterlyobservations.Thepositivesignisexpectedfortheeffecto f thisvariableo ngrowth(Bruno,M.,&Easterly,W,1998;Andrés&Hernando,1 9 9 9 )

- Inflation(2) isthed u m m y v a r i a b l e t h a t t a k e s o n t h e

v a l u e ofo n e i f inflationi s greatert h a n t h e sampleg r o u p ( a l l e c o n o m i e s ) mediananda v a l u e ofz e r o otherwise.Thedataisinannualformat,soweusetheoverlap pingannualdatawithq u a r t e r l y observations.T h e negativesignisexpectedforthi svariablesongrowth(Bruno,M.,&Easterly,W,1998;Andrés&Hernando,1999)

-

TheratioofLiquid-LiabilitiesinfinancialsystemtoGDP.M0(thetotalvalueofc u r r e n c y anddepositint hecentralbank)plusM1(depositsandelectroniccurrency)p l u s M2(timea n d s a v i n g s

d e p o s i t e s a n d o t h e r depositfortransferableforeigncurrency,certificatesaswe

llassecurities repurchaseagreements)pluschecksfortravelers,paper for trades,timedepositsforforeigncurrency,andshareoffundsfor