The Effect of the Knowledge-Based Economy on the Development of Financial Markets: Panel Cointegration Technique with ARDL Approach

Development of financial markets and its influential factors has been one of the main concerns for economists, especially in the recent decades. Since in the knowledge-based economy, production, distribution, and use of knowledge and information are the principal drivers of development, wealth creation and employment in all economic activities, examining the effect of the knowledge-based economy indicators in the development process of the financial market is very crucial. In this paper, the effect of knowledge-based economy indicators (education expenditures, spending on ICT, research and development expenditure, the experts in research and development, registered patents and innovations, exports of high-tech and quality of regulations) on the development of financial markets is examined for the 9 developing countries (in particular, Iran) during the period 2002 to 2014. A panel cointegration technique with the approach of Autoregressive Distributed Lag (ARDL) is employed to estimate the effect of the variables. The results suggest that the impact of the knowledge-based economy indicators on the stock market (the value of shares traded on the stock market on GDP) and the money market (credit provided by the banking system) is positive.