Causal Links among Stock Market Development Determinants: Evidence from Jordan

The stock market plays a crucial role in the growth of industry and trade, which eventually affects the economy. This paper studies the determinants of stock market development in Jordan using yearly time-series data (1978–2019). The autoregressive distributed lag approach is applied to examine co-integration, while the vector error correction model is employed to estimate (long-run and short-run) causal relationships. The results show that macroeconomic determinants such as gross domestic product, gross domestic savings, investment rate, credit to the private sector, broadest money supply, stock market liquidity, and inflation rate are important determinants of stock market development. These findings provide vital implications for policymakers in developed and emerging stock markets. First, economic development plays an imperative role in stock market development. Second, developing the banking sector is mandatory because it can significantly promote stock market development. Third, domestic investment is a significant determinant of stock market development, especially in emerging countries. However, it is vital to launch policies that lead to encourage investment and promote stock market development, and this could be done through (1) encouraging competition, (2) improving the institutional framework, and (3) removing trade blocks by establishing a mutual connection between foreign private investment entities and government authorities.