Determinants of Stock Market Development: Role of Globalization

The importance of understanding the determinants of stock market capitalization take the attention of researchers and policymakers around the world. Nonetheless, there is no consent in the literature about the description of the relationship between globalization along with chosen important macroeconomic factors and stock market capitalization. Hence, this thesis contributes to the argument by assessing the effect of globalization and several macroeconomic factors on stock market capitalization in South Africa. Using yearly data from 1975 to 2017, the thesis adopted Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root tests, Johansen cointegration test, Granger causality and fully modified OLS (FMOLS) regression techniques. FMOLS regression results indicate that trade openness, economic growth and money supply have positive impacts on stock market capitalization. However, globalization and domestic savings have negative association with stock market capitalization. Therefore, this thesis concludes that globalization and the other macroeconomic variables are significant determinants. It is thus recommended that decision makers in South Africa and mostly other developing countries should adopt stock market regulations to protect the domestic stock market against the negative effect of globalization. Results of this thesis can be a guideline for other developing countries to create effective policies around stock market capitalization.