HOW DO THE MACROECONOMIC DETERMINANTS UNDERPIN THE CAPITAL MARKET DEVELOPMENT IN NORTH MACEDONIA?

Abstract

The capital market plays a vital role in economic growth since it is an important source of financing the business sector’s investments. Hence, a developed capital market enables efficient financial resource allocation by channeling domestic savings to those that need capital, which in turn leads to increased investment directed towards innovation and supports sustainable growth. The main objective of this research is to examine the impact of macroeconomic determinants on the capital market development in the Republic of North Macedonia. The focus has been put on the investigation of two dependent variables, stock market turnover to GDP ratio and stock market turnover to market capitalization ratio (Turnover Ratio) as parameters resembling the liquidity (depth) of the capital market, and how they depend on the economic growth, macroeconomic stability, trade openness and gross investments to GDP ratio. The empirical study is based on a time-series data analysis based on relevant secondary data sources, based on the utilization of the Johansen Test of Cointegration and the development of a corresponding Vector Error Correction Model (VECM) to estimate the relationship, the impact, the magnitude, and the significance of the determinants that support, and influence the liquidity of the stock market in North Macedonia during the period from 2008:Q1 to 2021:Q4. The analysis shows the existence of a significant long-run relationship between the observed macroeconomic factors and the stock market liquidity. The findings indicate that imports and real interest rates have a negative, yet statistically significant impact on the stock market turnover to GDP ratio. The gross domestic product rate, exports, and inflation rate have all a positive and statistically significant impact on the stock market turnover to GDP ratio. Gross investments also positively affect the stock market turnover to GDP ratio, but not significantly. On the other hand, the analysis shows that gross investments and exports have a positive, yet statistically significant impact on the stock market turnover to market capitalization ratio. The gross domestic product, imports, and inflation rate have all a negative and statistically significant impact, whilst the impact of the interest rates is negative but insignificant.