The Effect of Financial Depth on Stock Return: The Bounds Testing Approach

Financial depth is one of the requirements of financial development. Countries whit the greater depth, financial resources are efficiently allocated between needs and can lead to greater efficiency and proper functioning of economic sectors. The purpose of this study is to evaluate the effect of financial depth on stock returns. In this regard, the ratio of liquidity to GDP is employed as indicator of financial depth. Also, among the other macroeconomic variables affecting the stock return, inflation, market exchange rate and oil revenues are considered. This study applies the Bounds test and Autoregressive Distributed Lag (ARDL) models for Iranian economic during 1997-2015. The results provide a positive relationship between financial depth and stock return but insignificant.