Are Banks and Stock Markets Complements or Substitutes?

Networks Financial Institute Working Paper No. 2007-WP-04

Posted: 21 Jul 2008

See all articles by Malay K. Dey

Malay K. Dey

Cornell University; Quinnipiac University - Lender School of Business

Date Written: January 2007

Abstract

We examine the determinants of stock market and bank liquidity in an economy in a SUR framework in which stock market turnover and available bank credit denoting access to long and short term capital respectively are interdependent and the errors are correlated. The SUR results suggest that available bank credit and stock market turnover are inversely related to each other, confirming their substitutability in terms of external financing needed by corporations. Other significant common factors for stock market turnover and available bank credit include stock market growth, legal origin, and whether the stock market is developed or emerging, an indicator of path dependence. These common determinants of stock market and bank liquidity are generally stable over time.

Keywords: Stock exchange liquidity, growth, bank credit

Suggested Citation

Dey, Malay K. and Dey, Malay K., Are Banks and Stock Markets Complements or Substitutes? (January 2007). Networks Financial Institute Working Paper No. 2007-WP-04, Available at SSRN: https://ssrn.com/abstract=1065481

Malay K. Dey (Contact Author)

Quinnipiac University - Lender School of Business ( email )

United States

Cornell University ( email )

United States

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