Macroeconomic Determinants of Stock Market Development: Evidence from a Panel of Ten Most Capitalized African Stock Markets

The study investigated the macroeconomic determinants of stock market development (SMD) in Africa’s ten most capitalized stock markets using yearly data from 1986 – 2021. The empirical work is based on the panel unit root test using both Levin, Lin and Chu panel unit root test and Im, Pesaran and Shin panel unit root test, Pedroni co-integration, Pooled Mean Group Estimator (PMGE) and Dumitrescu and Hurlin panel causality test. Both unit root test results showed that the series are stationary at level and first difference. Pedroni co-integration result showed a long-run relationship between SMD and its determinants namely interest rate, exchange rate, FDI, economic growth, inflation and banking sector development, while the Pooled Mean Group results indicated that there is evidence of co-integration between SMD and all the macroeconomic variables at all levels of significance for the combined panel of selected countries. Specifically, there is a positive relationship between SMD and interest rate, exchange rate and banking sector development on the one hand, and a negative relationship between SMD and foreign direct investment, inflation rate and economic growth. Moreso, co-integration exists between SMD and all the macroeconomic variables in each country studied. The result also indicated that the nexus between SMD and economic growth is statistically significant across the country with exception of South Africa and Egypt. Dumitrescu and Hurlin panel causality test results showed a bidirectional causality between SMD and the duo of FDI and BSD and interest rate granger cause SMD. The result recommends policy makers to maintain fiscal and monetary policies to increase demand for funds to the private sector and subsequently enhance stock market development. More so, business cycle stabilization policies that would enhance foreign exchange market should be embarked on, as an appreciating exchange market may boost the stock market.