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On the link between the shadow economy and stock market development: An asymmetry analysis

Massomeh Hajilee, Donna Y. Stringer and Linda A. Hayes

The Quarterly Review of Economics and Finance, 2021, vol. 80, issue C, 303-316

Abstract: The existence of the shadow economy adversely affects stock market performance. Despite considerable studies on the impact of the shadow economy on different macroeconomic variables, to the best of our knowledge, this is the first study on the relationship between the shadow economy and stock market development. This study investigates the link between the shadow economy and stock market development for a group of 17 selected emerging economies for the period of 1980−2017. The long-run and short-run relationships are examined. In addition to the Pesaran et al. (2001) bounds testing approach to cointegration and error correction modeling (or linear ARDL model), we also employ the Shin et al. (2014) nonlinear cointegration approach, which investigates the asymmetric impact of the shadow economy on stock market development. Using a linear model, our findings show that, in a majority of countries in this sample, the existence of the shadow economy adversely affects stock market development. Meanwhile, as the first study using the N-ARDL estimation approach to investigate this relationship, we provide robust and strong statistical evidence that the impact of the shadow economy on stock market development, an important part of financial market development, is not symmetric.

Keywords: Shadow economy; Stock market development; Bounds testing; Emerging economies (search for similar items in EconPapers)
JEL-codes: E43 G28 O16 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:80:y:2021:i:c:p:303-316

DOI: 10.1016/j.qref.2021.02.011

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