The Effect of Government Deficit and Banking Sector Credit on the Stock Market Size:Panel VAR Model Approach

The purpose of this study is to examine the effect of banking sector credit and government deficit’s shock on stock market size in selected developing countries. Analysis has been made on data from 15 developing countries over the period 2012-1993, using panel VAR model. Causality test results show that at 95% confidence level there is not causal relationship between bank credit and the private sector and stock market capitalization (market size). But stock market capitalization variable had a causal effect on the government deficit and gross fixed capital .The analysis of impulse response functions reflects banking sector credit and deficit shocks’ positive effect and negative effect of shocks gross fixed capital formation on stock market capitalization index. Analysis of variance showed that the effect of stock market capitalization variable shock explained high percentage of its prediction error variance; and then arrange the gross fixed capital formation, government deficit and bank credit to the private sector to explain the fluctuations of stock market capitalization index.