The Effects of Equity Market Liberalization on Economic Growth: Evidence from Bangladesh

Abstract

This paper focuses on making an investigation into how liberalization of the equity market of Bangladesh affected its economic performance. A large body of scholarly literature have speculated that equity market liberalization, that is to say, the opening up of the equity market to foreign investors, is likely to be beneficial for the economy because international integration of equity markets leads to a higher ability to hedge portfolio risks, thus, encouraging higher investment and, in turn, leading to increases in economic growth. The inflow of foreign capital is also conjectured to lead to a decrease in cost of capital resulting in further encouragement of domestic investment. Empirical analysis done in this paper yielded results that proved that following liberalization of Bangladesh’s equity market, there was a statistically significant structural break in the market capitalization of Dhaka Stock Exchange, signifying that the resulting inflow of new investment had positive growth effects on the market size and value. Additionally, the paper also tried to isolate the effect of liberalization on per Capita GDP growth and concluded that, on average, liberalization leads to a 1.2% rise in per Capita growth rate which is in line with results put forth by other researchers in this topic.