Bank stocks inform higher growth—A System GMM analysis of ten emerging markets in Asia
Section snippets
Introduction and Motivation
The recent financial crisis has polarized opinions about the banking sector and its contribution to economic growth. Empirical research has established their significant contribution to economic growth at firm, industry and country levels. A pre-crisis evaluation by Cole, Moshirian, and Wu (2008) utilized specific bank stock returns to move away from aggregate macroeconomic measures in quantifying financial sector influence on future economic growth. Such an analysis combines the study of
Literature Review
There is a rich recent literature around bank equity and Financial development as well as delineation of the recent Global Financial crisis. Gibson, Hall and Tavlas (2016) review the modeling of bank equity prices during the crisis deploying a three-equation model in Panel GMM (log-level of Prices) to recover a recursive impact of the crisis between sovereigns and banks. Our study of the crisis in Asia shows that such a recursive relationship was instrumental in extending the crisis in Asian
Hypothesis Development
A quickly deployed VAR system (available with the authors) specifying the inter relationships between bank stock portfolios, stock index and GDP growth shows no relationship between the three variables because of a contemporaneous interplay of all three through investors, experts and industry on one hand and traders, investors and bankers on the other hand, as well as firm, sector and industry specific unobserved heterogeneity at play. Our intuition suggests banks possess superior private
Experiment Design: Data and Methodology
We select quarterly bank stock returns as well as market capitalization of each included bank and retrieve the quarterly data for GDP growth for the selected panel countries from Reuters Datastream. The portfolio of banks included in each of the 10 markets include at least the banks included in the broad-based market index in each domestic stock market and those engaged in transactions in the markets for corporate control. The resulting bank stock portfolio is thus weighted by the Market
Results and Discussion
The entire data series extends from 1999q1-2017q3 resulting in 71 observations for each country in the sample. 10 portfolios are constructed from individual banks using data from Reuters Datastream(Eikon). The series of banks is selected from Datastream, already adjusted for survivor bias till 1995. The corresponding macroeconomic aggregates are retrieved on a quarterly basis as Financial development measures including ratios of Private credit(Priv) to GDP and Commercial-Central Bank(CCB) asset
Conclusions
Bank stocks are significant determinants of GDP growth in strong emerging market economies and stronger institutional characteristics shown by acquisition active firms and stronger corporate governance banks can lead to deepening and consistency of growth memes for the broader industry and the larger public economy in these markets. Even during the crises GDP growth and bank stock returns remain highly positive for these economies. None of the selected economies is significantly affected by
Declaration of Competing Interest
None.
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