Financial development and stock returns*

Financial development and stock returns∗
Harris Dellas†
Department of Economics
University of Bern
CEPR, IMOP
Martin K. Hess‡
ITAM, Mexico
March 21, 2002
Abstract
We study the relationship between financial development (F D) and stock returns
in a panel of emerging and mature markets using both banking and stock market
indicators of F D. We find that while banking development lowers, stock market
development increases mean returns. That a higher ”quality—size” of the banking
sector constraints volatility in the less financially developed countries but has the
opposite effect in more financially developed countries. And that the international
diversification value of a country’s stocks decreases with F D.
∗
We are grateful to E. Baltensperger, V. Koubi and C. Wyplosz for valuable comments and to Ecoscientia Stiftung for generous financial support.
†
Gesellschaftsstrasse 49, CH—3012 Bern, Switzerland. Tel: (+41) 31—631—3989, Fax: (+41) 31—631—
3992. Email: harris.dellas@vwi.unibe.ch, Homepage: http://www-vwi.unibe.ch/amakro/dellas.htm
‡
Instituto Tecnológico Autónomo de México, División Académica de Administración, Av. Camino
a Santa Teresa #930, Col. Héroes de Padierna, Del. Magdalena Contreras, C.P. 10700 México, D.F.
MÉXICO, Tel (+52) 56-28-4000 ext. 6525, Fax: (+52) 54-90-4665, Email: mhess@itam.mx, Homepage:
http://ciep.itam.mx/~mhess. Part of this paper was written while Hess was affiliated with Studienzentrum Gerzensee.
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