Financial Openness, Institutional Quality and Stock Market Development: A Study of Lower-Middle-Income Countries

This paper analyses the impact of financial openness on the development of the stock market in LMICs. Depth of market, interest, and inflation rates are macroeconomic variables, while the independent variable is financial openness, and the dependent variable is stock market growth. This information was assembled from World Development Indicators (WDI), IMF, and Worldwide Governance Indicators (WGI) for the years 2013-2023. Descriptive statistics, correlation analysis, and regression analysis are the panel data analysis techniques employed in this study to assess the relationship between SMD and FO. The results show that FO has a significantly positive effect on SMD when it is constrained by good institutional quality. The study’s findings demonstrate that FO, supported by robust institutional structures, can accelerate the expansion of the financial marketplace in lower-middle-income countries, offering policymakers helpful direction. The government should consider strengthening institutional frameworks while promoting financial liberalization to ensure consistent development in the capital market.