Income Inequality, Poverty, and the Liquidity of Stock Markets

Abstract

Prior research has documented that the development of stocks markets, and in particular, stock market liquidity is directly associated with economic growth. However, the literature has yet to determine whether the liquidity-growth relationship disproportionately affects a particular group within the income distribution. Using a broad cross-sectional sample of countries, this study tests whether the growth associated with market liquidity affects the level of income inequality. After holding a variety of factors constant – including the level of financial market development, results show that liquidity in a country’s stock market is negatively related to a country’s Gini coefficient. Further, liquidity is associated with reductions (an increase) in the share of income earned by individuals in the top (bottom) quantile of the income distribution. In additional tests, we find that stock market liquidity also reduces poverty rates in our sample of countries.

Keywords: Income Inequality, Poverty Alleviation, Stock Markets, Liquidity, Capital Markets, Financial Development