Purpose: This study aims to identify the key drivers and impediments to stock
market development in Bangladesh by empirically examining the dynamic
relationships between macroeconomic variables and stock market development.
Methodology: The analysis utilizes the Autoregressive Distributed Lag (ARDL)
bounds testing approach, applied to annual time series data spanning a 31-year
period. Prior to estimation, unit root tests are conducted to establish the integration
properties of the variables, ensuring the appropriateness of the ARDL framework.
Model specification is validated through standard diagnostic tests. Furthermore,
Granger causality tests are employed to assess the directionality of causal
relationships between stock market development and macroeconomic indicators.
Findings: The results provide robust evidence of a long-run cointegrating
relationship between stock market development and its macroeconomic
determinants. In the long term, the exchange rate and foreign direct investment
(FDI) are found to exert significant negative effects on stock market development,
whereas domestic credit to the private sector exhibits a strong positive influence. In
the short run, trade openness and economic growth are also identified as influential
factors, though their effects are primarily transitory. The Granger causality analysis
reveals predominantly unidirectional causal links from macroeconomic variables to
stock market development, with limited instances of bidirectional causality
involving economic growth and FDI.
Practical Implications: The findings underscore the need for policymakers to
prioritize exchange rate stability, domestic banking sector development, and adopt
strategic approaches to FDI management. A coherent and coordinated
macroeconomic policy framework is essential to foster sustainable stock market
growth.
Value/Originality: The research advances the relatively sparse empirical literature
on the determinants of stock market development in Bangladesh. By elucidating the
complex interactions between macroeconomic variables and market performance,
the study offers critical insights for policymakers, regulators, and investors seeking
to promote financial market development in similar economic contexts.
Limitations: This study is confined to the Bangladeshi context and a specific
timeframe, which may limit generalizability to other emerging economies.
