Do trade openness and derivative markets nexus play vital role on economic development? Empirical investigation from developed and emerging economies

The persistent global risks make the situation more challenging for the economies to show progression in economic growth. A well-functioning derivative market makes it feasible for firms to share risk effectively by means of financial development which contributes immensely in overall economic development. This study focuses on evaluating the financial growth and economic development nexus through trade openness in developed and emerging economies. The study dataset comprises of upper- and middle-income group economies and applied the Granger causality test along with panel regression fixed effect (FE) and panel corrected standard error (PCSE) model techniques. The findings reveal that bidirectional homogenous Granger causality exists universally among derivative markets and economic development. The study establishes that derivative markets are integrated with economic development and macroeconomic variables in countries with high income compared to the upper-middle-income group. The findings favour the PCSEs model over the FE model with conclusive evidence. Furthermore, openness to trade significantly contributes more to financial development compared to macroeconomic variables. Results based on the IRF test statistics confirm that the derivative market response of shocks is statistically significant to GDP and trade openness for upper-middle-income economies. This study makes an original contribution by considering trade openness, derivative markets and macroeconomic factors play vital role in the growth nexus especially for emerging economies.