The Use of Economic Indicators as Early Signals of Stock Market Progress: Perspectives from Market Potential Index

Tarek Eldomiaty (), Islam Azzam, Mostafa Fouad and Yasmeen Said
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Tarek Eldomiaty: School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Islam Azzam: School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Mostafa Fouad: School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Yasmeen Said: School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt

IJFS, 2024, vol. 12, issue 1, 1-18

Abstract: The progress of financial markets depends on the way world investors foresee the market potential of the country of choice. Countries that are associated with favorable economic incentives are able to motivate investments in their respective stock markets. The objective of this paper is to examine the role of the many economic components which constitute the Market Potential Index in enhancing stock market progress. The methodology goes through testing and estimation. The tests include linearity versus nonlinearity (RESET), normality, and cointegration. The estimation includes cointegration regression and discriminant analysis to distinguish between high and low stock market progress. This study examines unbalanced panel data that covers the years 1996–2022 for 54 countries where a stock market exists. The results show the following: (a) increases in people’s expenditure result in decreases in consumption of investment in financial securities; (b) the investments in infrastructure technology is positively associated with stock market progress; (c) the positive effect of economic freedom indicates that further adaptive trading regulations are beneficial to stock market progress; (d) increases in imports consume large proportions of people’s income, coming at the expense of investment in financial securities; (e) stock markets that are associated with high country risk are characterized by a positive risk–return tradeoff, i.e., a high risk premium; (f) the stock markets listed in the MPI can reach high progress by improving three indicators, namely commercial infrastructure, market receptivity, and country risk. This paper offers a thorough and unique examination of the institutional arrangements and stock market progress. The paper offers a guide to policy makers about how economic institutional arrangements can be promoted in order to reach high stock market progress.

Keywords: Market Potential Index; stock market capitalization; number of listed firms; percentage of market capitalization to GDP; Z-score (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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