MODOS DE FUNCIONAMIENTO

3.4.3.2 Correlations between various indicators of stock market

development

We run a Spearman rank correlation test to investigate the level and significance of correlation among the different measures of stock market development. This test is widely used to test the degree of association of two variables. The analysis on stock market size and liquidity trends shows that these measures of stock market development might be significantly correlated. We perform a correlation test to see whether this is the case for our

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sample of 15 African countries. The correlation test is done on 3 measures of stock market development and aggregate measure of stock market development. The aggregate of stock market development (SMINDEX) comprises of three different ranges of traditional measures31 of stock market development to derive a uni-dimensional measure of stock market development. This is because each variable used individually, may not be sufficient to represent the attributes of stock markets that are discussed in Chapter 4.

The results in Table 12 confirm that indeed value traded/GDP (VSTG) is highly correlated with the computed index of overall stock market development (SMINDEX), with a correlation coefficient of 0.98, but having a correlation coefficient of 0.85 and 0.91 with market capitalization/GDP (MCAPG) ratio and turnover ratio (TOR), respectively (See Table 12). The market capitalization/GDP ratio and turnover ratio have a 0.85 correlation with the index of overall stock market development.

Thus, the degree of trading relative to the size of the economy (Value traded/GDP) is highly correlated with the degree of trading relative to the size of the market (Turnover ratio). These two measures of liquidity do not move one to one, they therefore provide complementary information on stock market liquidity. There is a relatively low correlation between turnover ratio and market capitalization/GDP ratio; at a correlation coefficient of 0.60 it shows that these nuanced different indicators capture different aspects of stock market development.

We followed Demirguc-Kunt and Levine (1996) in computing the overall index of stock market development (SMINDEX); the discussion on the algorithm behind this composite indicator is provided in Chapter 4.

31 _{Traditional measures of stock market development of interest to this research are market capitalization, value}

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Table 12: Spearman rank correlation matrix for sample countries32.

Indicators* SMINDEX

Market

capitalization/GDP

Value

Traded/GDP Turnover ratio

SMINDEX 1 0.8485 0.9835 0.8435 p-value 0 0.0000 0.0000 0.0000 No. observations 240 209 206 206 Market capitalization/GDP 1 0.8415 0.5979 p-value 0.0000 0.0000 0.0000 No. observations 209 205 204 Value Traded/GDP 1 0.9149 p-value 0.0000 0.0000 No. observations 206 203 Turnover ratio 1 p-value 0.0000 No. observations 206

*The bolded numbers corresponding to each indicator is the measure of degree of correlation between these variables.

The last aspect of this section is a discussion on the financial structure of the sample countries. The discussion tries to answer the question about: What is the relative development of stock markets versus banks in these countries over the past 15 years? The two indicators of financial structure included in this study are the Structure-Size, measured as the ratio of Stock Market Capitalization to GDP divided by the ratio of Bank Credit to GDP. The other measure of financial structure is Structure-Activity, measured as the ratio of Stock Market Value of share traded to GDP divided by the ratio of Bank Credit to GDP. In both cases, higher values indicate a market-based financial system. The difference between the two indicators is that the Structure-Size focuses on the value of total outstanding shares of the country’s stock exchanges. The Structure-Activity on the other hand, focuses on the liquidity of the country’s stock exchanges.

Figure 4 on Structure-Activity shows that many countries have severe illiquidity challenges, with the exception of South Africa and Egypt. Figures 4 and 5 show that African countries in our sample recorded an increased importance of the stock markets relative to the bank systems over the past 15 years.

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Figure 4: Financial-Structure Activity of Selected African Countries.

Source: World Development Indicators.

The stock market depth has been increasing at greater pace as shown by Figure 5 for all countries with the exception of Tunisia, Morocco and Mauritius. The other countries such as Zimbabwe and Nigeria have been witnessing a higher number of new listings (see Table 8) South Africa and Egypt have the highest number of listed companies among our sample of stock exchanges but they have been massive delisting in these two exchanges over the past decade.

The study by Beck and Demirguc-Kunt (2009) shows that though indicators of the Structure- Size do not vary much across countries, indicators of the Structure-Activity clearly suggest a more important role for stock markets than banks, since a high liquid market helps in easing trading of risk. In the sample of selected African countries, all countries indicate a significant growth trend in these markets but a rather disappointing big and inactive markets as shown by Figure 4, Botswana is an interesting case in point with negative bank credit in the past few years.

As expected African countries boast of relatively big stock exchanges in terms of size due to increased level of listing in recent years as reflected in Figure 5; but as an advance on current empirical literature, this study will try to explore the relevance of both stock market liquidity and size in the economic perfomance of our sample countries.

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Figure 5: Financial Structure-Size of Selected African Countries.

Source: World Development Indicators.