Impact of Stock Market Liberalization on Returns Volatility and Economic Growth: An Evidence from Asian Economies

Abstract

The liberalization-privatization-globalization plays a role of catalyst and laid the pathways for economic development in emerging and developed economies. The financial market liberalization unlocked the new channels for foreign capital entry. Inflows led to appreciating real exchanges rate, to a rapid expansion of bank lending, and especially to increasing vulnerability to a reversal in capital inflows. The present study tries to quantify the dynamics persistence among and impact of, stock market liberalization on returns volatility in 14 Asian economies through modelling the GARCH and TGARCH model of volatility. The impact of stock market financial liberalization on returns volatility in Asian economies is witnessed subsequently by categorizing the study period into three phases, namely pre-, during, and postliberalization periods. The dynamicity and behaviour in returns volatility further entangled through employing the daily, weekly and monthly frequency data set to witness the impact of financial stock market liberalization on volatility returns in Asian economies including global financial crunch of 2007-08. Successively, the second phase of the study examines the impact of stock market liberalization on industrial growth in the Indian economy. The literature insists and accounts for the direct relationship among financial stock market liberalization and economic growth. Thus, the third phase of the study tries to examine the impact of financial stock market liberalization on the economic growth in Asian economies owing to different course of liberalization, after controlling the macro-economic factors. The findings confirms the positive impact of financial stock market liberalization on returns volatility in Asian economies. The evidences revealed that stock market liberalization significantly increased the returns volatility. In addition, the during- and post-liberalization periods experienced an incremental impact of financial stock market liberalization on returns volatility as compared to full period. Japan witnessed asymmetric (leverage) impact on returns volatility in post-liberalization and full periods, respectively and thus leads to increase in returns volatility. The industries indulging in financial and non-financial activities witnessed equivalent growth impact throughout the phases of stock market liberalization in Indian economy. Furthermore, the evidences revealed that, Hong Kong and Malaysia exerts positive and Republic of Korea exerts negative economic growth in during-liberalization period. Concurrently, China, Japan, and Republic of Korea felt significant positive and, India and Hong Kong has witnessed negative economic growth after stock market liberalization.