The Growth of Global Equity Markets: A Closer Look

This paper presents both the time-series and cross-country evidence on the growth of global equity markets and attempts to shed some light on the sources of equity market growth. I show that for developed countries market size is positively related to correlation of stock markets with the global portfolio, and that it is negatively related to government consumption. For emerging market countries, financial intermediaries and trade openness are found to be conducive to the development of local equity markets. Ceteris paribus, developed countries with greater economic freedom and stronger shareholder protections are associated with more highly valued equity markets, while French and German civil law countries and countries with insider trading legislation tend to have relatively poorly valued equity markets. Emerging market countries with high quality of accounting standards are associated with more highly valued equity markets. Over time, only equities in emerging markets become more highly valued. It appears that favorable changes in valuation technology contribute to a large part of the growth in global equity markets. JEL classification: G15, international financial markets; G18, government policy and regulation; G34, corporate governance; C11, Bayesian analysis; C15, statistical simulation methods