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Stock Market Development and Economic Performance Between
Developed and Developing Countries:
Risk Premium and Exchange Rate Targeting Policy
Chew Wen Hong
Supervisor: Dr. Hazman bin Samsudin
Bachelor of Economics (Natural Resources)
School Of Social and Economic Development
In recent decades, economists have devote considerable attention to the study of the
relationship between stock market development and economic performance,
especially after a series of economic crises. It is deemed that stock market
development is the root cause of the catastrophic event. Therefore, this study aimed
to investigate the impact of the stock market on economic performance between
developed and developing countries. The study employed secondary data obtained
from the World Development Indicator (WDI) for 8 developed and developing
countries from 2001 to 2014. It is found that the effect of risk premium and exchange
rate as an instrumental variable in the model is pronounced. The finding is derived
through Two-Stage Least Square (2SLS) method under fixed effect condition. The
finding is also subjected to goodness of fit test and diagnostic checking. It is found
that there is the strong positive relationship between stock market development and
economic growth in both developed and developing countries. The finding suggests
that both developed and developing countries should emphasize on risk premium and
exchange rate targeting policy in order to promote stock market development and
hence economic growth in the long run.
Keywords: risk premium, exchange rate, stock market, economic performance
1445 | UMT UNDERGRADUATE RESEARCH DAY 2018