The Determinants of Emerging Financial Markets Development: A Case Study of the Dar es Salaam Stock Exchange, Tanzania

Benedicta K. Kamazima, John Kebaso Omurwa


The stock market plays a vital role in financial intermediation in developed and developing economies (Laichena & Obwogi, 2015). That is because stock markets provide a platform for surplus resources to be transferred to deficit areas. Developing countries lack efficient stock markets like those of the developed countries (Coleman & Tetty, 2008). Therefore, the study sought to investigate the determinants of emerging financial market development using the Dar es Salaam Stock Exchange, Tanzania as a case study. The study had the following specific objectives: to analyze the extent by which market liquidity determines development of emerging financial markets, to establish how inflation rates decides the development of emerging financial markets, to explore how market volatility concludes the development of emerging financial markets and to establish how economic growth determines the development of emerging financial markets. Relevant empirical and theoretical literature was reviewed to inform the objectives of the study and to also form a ground for discussion of results. The study employed a multivariate times series econometric design. The target population of the study included the DSE financial statement data and statistical data from the National Bureau of Statistics, Tanzania.  The study used secondary data spanning the period between 2007 and 2016. The data used for the analysis were the monthly figures obtained from the Dar es Salaam Stock Exchange and the National Bureau of Statistics of Tanzania. Diagnostic and model specification tests were done on the data using E-Views version 9. Data was treated for the problem of time series data. To compute forecasts from models with cointegration restrictions, the model is transformed into the VAR levels representation (Brüggemann, 2004). Thus the study used the unrestricted vector autoregressive (VAR) model to do a regression of the dependent variables on the independent variables. The study results were interpreted based on the VAR output. The study concluded that stock market volatility, stock market liquidity and economic growth had a positive and significant long-run relationship with financial market development. Whereas, inflation rates had a negative and insignificant relationship with financial market development. The study recommended that Tanzania relooks at and optimizes its expansionary monetary policy. Policymakers should follow or implement policies which raise macroeconomic stability considering the interaction between economic growth and stock market development.

Keywords: stock exchange, emerging market, market capitalization


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