Discussion Paper

No. 2016-35 | July 08, 2016
Stock Market and Economic Growth in Eastern Europe
(Published in Special Issue Recent Developments in Applied Economics)


A developed financial system is essential in a market economy. This paper studies the importance of the development of financial markets in general, and the stock market in particular, from the review of existing literature in the area of the relationship between financial development and economic growth, and especially, the link between the stock market and economic growth. Through an empirical analysis for six countries in Eastern Europe (Bulgaria, Slovakia, Hungary, Poland, Czech Republic and Romania) it is tried to show the link between the stock market development and economic growth in these countries from 1995 to 2012 in order to explain the transition processes, from communist to market economies, which began with the fall of the Berlin Wall in 1989. The results show evidence of Granger causality between economic growth variables and financial market variables.

JEL Classification:

F43, O16, G2


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Cite As

María A. Prats and Beatriz Sandoval (2016). Stock Market and Economic Growth in Eastern Europe. Economics Discussion Papers, No 2016-35, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-35

Comments and Questions

Anonymous - Referee Report 1
July 11, 2016 - 13:03

This paper provides a valuable analysis of a relevant topic, i.e., the relationship between stock market and economic growth in six Central and Eastern European countries (CEECs). Also, the authors show a good command of both the theoretical literature and the econometric techniques. However, the paper suffers from serious problems ...[more]

... of presentation, which should be corrected for the paper being accepted for publication.

First, the introduction seems rather “flat”. One misses some more motivation, with some descriptive information about the CEECs and their level of financial development (for instance, note 3 could be placed here), the interest of studying such countries, and the like. Which is the contribution of the paper? One can guess that the analysis of this paper has not been performed on the CEECs, unlike other countries. All this should be discussed in the introduction.

Section 2, on the contrary, seems to be unnecessarily long: 5 and a half pages over 12 pages of text! In particular, since the emphasis of the paper is on the stock market, rather than on the financial system in general, subsection 2.1 should be considerably summarised, or even dropped. The rest of the section should also be summarised: there is no need of going so deep into the details. In addition, it could be helpful if the authors would include a last paragraph summarising and recapitulating the evidence previously reviewed.

Turning to the empirical section, which is the reason to include into the analysis the variable foreign direct investment? Is there any reason why the stock market and foreign direct investment should be related? In fact, this variable does not appear in the literature review in section 2. If any, the stock market might affect portfolio, rather than direct, investment. I think that, by dropping foreign direct investment from the analysis, the paper will gain in clearness. On the other hand, why these particular stock market variables have been used? I can guess that the reason is data availability, but this should be explicitly said.

Regarding the presentation of the results, I know that it is no easy, in a Granger‐causality exercise, reporting and discussing the results, since they are sometimes difficult to interpret. However, I think in this case it would be more helpful discussing the results country by country, so that the reader could better appreciate whether one variable Granger‐causes another, or there is bidirectional Granger‐causality instead. My own reading of the results (especially when omitting the role of foreign direct investment, a variable that darkens the whole picture) is that there is no clear evidence of Granger‐causality from stock market to growth; if any, Granger‐causality in the opposite sense seems to be more important. Here, and especially in the conclusions, the authors should be more risky when discussing their results. A couple of details here:

• The presentation of the results in the tables in pp. 11‐12 looks a bit odd. Why not keeping the ‘X’ to denote the existence of Granger‐causality, and adding one or two asterisks (or a small ‘a’ or ‘b’) to denote the level of statistical significance? By the way, these tables should
be numbered.
• Which is the sense of the table in p. 12? It could be easily dropped. The relevant issue for the paper is the relationship between stock market variables and economic growth.

Finally, there are some problems when presenting the references:
• Some authors appear sometimes wrongly written: “Meyer” instead of Mayer (p. 5), “Schin”
instead of Shin (p. 10), “Watchel” instead of Wachtel (p. 17).
• There are several errata regarding the years of publication:
‐ Granger’s paper on Granger‐causality was published in 1969, not 1968 (p. 10).
‐ The paper by Kwiatkowski, Phillips, Schmidt and Shin was published in 1992, not in
2001 (p. 10) or 1991 (p. 15).
‐ The year (1992) is missing in the reference of Osterwald‐Lenum.
• There are several references that have been already published:

‐ Cavenaile at al. (2011), in De Economist (2014).
‐ Gehringer (2013), in International Journal of Monetary Economics and Finance (2014).
‐ Law and Singh (2013), in Journal of Banking & Finance (2014).
‐ Levine (2004), in Handbook of Economic Growth (2005).
‐ Mauro (2000), in Journal of Development Economics (2003).

And, last but not least, the authors should check their English, since the text is sometimes difficult to understand. For example, I am unable to understand the second paragraph after the equations in p.
9 (do the authors mean “quarterly” when they write “quartile”?).

Anonymous - REPLY TO REFEREE 1
July 26, 2016 - 11:29

Thank you very much for your suggestions, comments and corrections. We agree with all of them and we will proceed with a revised version of our paper in order to include them.

Anonymous - Referee Report 2
July 18, 2016 - 13:05

The paper studies the Granger causal relationship between stock market indicators and economic growth for six Eastern Europe economies in 1995–2012. It applies a VAR specification and provides evidence that, for most of the countries, stock exchange variables influenced GDP. In my opinion the subject is relevant, although, for the ...[more]

... paper to be published, the author(s) should address some shortcomings.

1. My first concern about the paper is the temporal horizon. I find it too short to accept the results without suspicion. For example, Ake and Dhuna (2010), to cite a paper referred to by the author(s) themselves, change their annual data (1995–2008) into quarterly to avoid the shortage of observations.

2. Moreover, I would ask the author(s) to compare their results with those of Caporale and Spagnolo (2011, WP Brunel University London), who use the same VAR methodology to study the cases of the Czech Republic, Hungary and Poland in 1996–2011, although at a monthly frequency. Without these comparisons, the contribution of the paper does not appear clear.

3. I assume that in the conclusions, when nominal GDP is mentioned, the authors mean real GDP.

4. In my opinion, the results of causality warrant a more orthodox presentation.

5. Finally, I also suggest the paper being revised by an English native.

Anonymous - REPLY TO REFEREE 2
July 26, 2016 - 11:39

Thank you very much for your all comments. We will take them into account in our revised version of our paper.

With respect to the temporal horizon, in our paper, you can see in page 9 that we have changed the annual data (1995-2012) into quarterly, as in Ake ...[more]

... and Dehuan (2010). Following the literature, we did it because, as you said, it’s normal to avoid the shortage of observations.