Reviewers' Comments - AstonJournals

BEJ-1_Vol2010CommReviewers’ CommentsReviewer 1:Recommendation: Acceptable with major revision & re-review.(1) The literature reviewed in the introduction part is deficient in two respects. First, theauthor does not refer to several related studies, which deal with the influence of stockmarket development on the economic growth. The author may refer to the three studieslisted below and make use of their references to observe the deficiency in his literaturereview.Akinlo A. ENISAN and Akinlo O. OLUFISAYO (2009), Stock Market Development and EconomicGrowth: Evidence From Seven Sub-Sahara African Countries, Journal of Economics and Business,61 (2), 162-171.Félix Fofana N'ZUE (2006), Stock Market Development and Economic Growth: Evidence fromCôte d’Ivoire, African Development Review, 18(1), 123-143.Charles K.D. ADJASI and Nicholas B. BIEKPE (2006), Stock Market Development and EconomicGrowth: The Case of Selected African Countries, African Development Review, 18(1), 144-161.Second, the author makes the introduction with studies concerning the influence of stockmarket development on the economic growth. However, the empirical part of the study beginswith a model that reflects the influence of economic growth on the stock market development.There is no literature in the introduction part to illustrate the background of the relationshipbetween stock market development and economic growth from this direction. In this context,the author can make use of the following two studies, which I reached at first glance, and referto other studies that the author should find out.Xiaohui LIU and Peter SINCLAIR (2008), Does the linkage between stock market performance andeconomic growth vary across Greater China?, Applied Economics Letters, 15 (7), 505-508.Kul B. LUINTEL and Mosahid KHAN (1999), A quantitative reassessment of the finance –growthnexus: evidence from a multivariate VAR, Journal of Development Economics, 60 (2), 381-405.(2) There is a methodological flaw in the study, as I mentioned above implicitly. Although theauthor makes an introduction by explaining the influence of the stock market developmenton the economic growth throughout the first part, he unexpectedly starts with a modelreflecting the influence of economic growth on the stock market development in the second

BEJ-1_Vol2010Commpart. Similarly, the author states that he adopts the VAR methodology, but starts with themodel (2.1), which a priori assumes SM as the dependent variable of the cointegrationequation estimated later. In this way, the author ignores the fact that all variables aretreated as endogenous initially in the VAR methodology by definition. Accordingly, theauthor does not explain why the estimated cointegration vector is normalized with respectto the SM variable, but not with respect to the GDP variable. Because the order of the seriesdoes not matter for the cointegration, the identification of the cointegrating vector shouldbe done properly and explained better.In the discussion part at the end of the study, the author argues that “the model of stock marketdevelopment is mainly characterized by the effect of economic growth and interest rate”.However, throughout the study there is no information demonstrating the theoretical groundsof such a model or a relationship. A similar model is used in the literature in the context of thefinancial development. However, the introduction of the study does not imply any objective ofanalyzing how stock market development is influenced by economic growth. If the author’sactual attempt is to use the stock market index as a proxy for the financial development, thenthe paper should be re-designed according to this context and other indicators of financialdevelopment should be included into the analysis to prove the robustness of the findings.Finally, the definitions of the GDP and R variables should be checked. The definition of the GDPvariable is not same in the list below the specification (2.1) and in the paragraph following thislist. The author should state whether R denotes the nominal or the real interest rate. The studyby Luintel and Khan (1999: 386) may be utilized for the definitions of these two variables.Moreover, it is not obvious why a negative effect of interest rate on stock market developmentis expected (see the estimate of the equation (2.3c)). As argued by Luintel and Khan (1999: 385),the higher real interest rate may have a positive effect on the stock market development byincreasing the financial depth through the increased volume of financial saving mobilisation.Thus, the author should give reasonable theoretical explanations about the relationshipbetween the variables in question.(3) When the I(1) series in question are cointegrated, the author should use a causality test thatexploits the error correction model. Granger causality conducted on the I(1) variables do nothave the standard F distribution. Please see,Hiro Y. TODA and Peter C. B. PHILLIPS (1993) Vector Autoregressions and Causality,Econometrica, 61 (6), 1367-1393.Hiro Y. TODA and Taku YAMAMOTO (1995) Statistical inferences in vector autoregressionswith possibly integrated processes, Journal of Econometrics, 66 (1-2), 225-250.The explanation of the econometric methodology constitute more than 50 % of the study, infact, which are readily available in econometrics books. The theoretical underpinings, literature

BEJ-1_Vol2010Command the empirical analyses, which would show the contribution of this study, stand relativelyweak. The author should improve the quality of the study in this respect.Reviewer 2:Recommendation: Acceptable in present form.The subject of the paper is very interesting, the results of this paper are useful for economicanalysis, and there are some important notes that you have to make.1) Page 2 last paragraph :‘The development of stock market is necessary to achieve full efficiency of capital allocation ifthe government can liberalize the financial system’.Substitute with the expression‘The necessity of stock market development is imperative need in order to achieve fullefficiency of capital allocation in case of government can liberalize the financial system’2) Page 3 last paragraph:‘In this study the method of vector autoregressive model (VAR) is adopted to estimate theeffects of economic growth on stock market taking into account the negative effect of interestrate on stock market development’.Substitute with the expression‘In this study a vector autoregressive model (VAR) is applied to estimate the effects of economicgrowth on stock market taking into account the negative effect of interest rate on stock marketdevelopment’.3) Page 4 first paragraph:‘Following the empirical study of’ Substitute with the expression ‘According to theempirical studies of ’and‘The data that are used in this analysis are annual covering the period 1965-2007 forGermany, regarding 2000 as a base year’.Substitute with the expression‘The sample used in this paper consists of annually observations for Germany and spans from1965 to 2007 regarding 2000 as a base year’.4) Page 5 first and second paragraph:‘The additional lagged terms are included to ensure that the errors are uncorrelated. Themaximum lag length begins with 2 lags and proceeds down to the appropriate lag by examiningthe AIC and SC information criteria’.Substitute with the expression

BEJ-1_Vol2010CommThe additional lagged terms are also included to ensure that the errors are uncorrelated. Themaximum lag length begins with 2 lags and proceeds down to the appropriate lag by examiningthe AIC and SC information criteria.and‘The null hypothesis is that the variable’Substitute with the expressionThe null hypothesis defines that the variable5) Page 9 second paragraph:‘Since the variables are supposed to be cointegrated’Substitute with the expression‘Since the variables are cointegrated’6) Page 11 second paragraph:‘The results related to the existence of Granger causal relationships among economic growth,stock market development, and interest rate appear in table 4’.Substitute with the expressionThe results related to the existence of Granger causal relationships among economic growth,stock market development, and interest rate are presented in table 4.7) Page 12 third paragraph:The results of the estimated vector error correction model as we can see in Table 3 suggestSubstitute with the expressionThe results of the estimated vector error correction model (Table 3) suggest8) Page 12 last paragraph:‘The results of Table 4 indicate that there………growth’.Substitute with the expressionWith regard to the detection of Granger causal effects there is……………………growth (Table 4).9) Page 14 last paragraph:‘This paper employs with the relationship between financial development and economicgrowth….1965-2007’. The empirical analysis….Substitute with the expression‘This paper examines empirically the relationship between financial development andeconomic growth…1965-2007’. The analysis….Reviewer 3:Recommendation: Acceptable with minor revision.This paper examines empirically the possible causal relationship between Stock Market andEconomic Growth using data from Germany. The topic is always hot and inferences areinteresting and contributing to the international literature.

BEJ-1_Vol2010CommA point which the author(s) should reconsider is the method for testing short-run and long-runcausality. Actually, he should report in a more clear way all three estimated EC models and applyWald tests on the individual groups of lagged differenced variables to detect possible causalshort-run impacts as well as the corresponding directions of the effects. Furthermore, theestimates of the coefficients of the lagged EC terms should be discussed together with theresults obtained from the cointegrating equation.Author’s Reply to Comments- The ultimate goal of this study was to examine empirically the causal relationship betweenstock market development and economic growth.- Taking into account that the most empirical studies investigate the effect of stock marketdevelopment on economic growth.- This study is focused on the main deterministic factors of stock market developmentemphasized only on the effect of economic growth and interest rate.- Therefore, the author does not present an analytical literature examining the theoreticalrelationship between stock market development and economic growth, but summarizes themost important indicative empirical studies discussing with this subject.- The examined model is selected with intention to examine the causal relations between theexamined variables.- Due to the usage of the VAR methodology the author should adopt a different mathematicalform for the selected examined modelas follows: V=f(GDP, SM, R) regarding each variable as dependent one. However, following theresults of the VAR methodology,- The best VAR model is selected in accordance with the basic priciples of economic theory andthe statistical significance of the examined coefficients of the estimated variables. Consequently,Table 3 presents the best estimated VAR model in relation to other two VAR models estimatingSM as dependent variable.- Taking into account the Johansen cointegration analysis, the best cointegrated vector isselected.

BEJ-1_Vol2010Comm- Based on the critical reviewer's comments, the author adds some literature references in thetheoretical part of this study.- The most representative estimation measures for financial market development are thegeneral stock market index, stock market liquidity and bank credits to private sector. Thegeneral stock market index expresses the trend of stock market development in conjunctionwith the investment growth and the low interest rate.- The empirical model of this study is consisted by gross domestic product, real interest rate andstock market index. The gross domestic product and the real interest rate have a positive andnegative effect on the gross domestic product respectively.- This model is based on some basic theoretical hypotheses: An increase of real interest ratecauses a decrease of stock market index, while an increase of gross domestic product causes anincrease of stock market index.- This study does not comply with the empirical study of Luintel and Khan (1999), but followsLevine (2002), Vazakidis and Adamopoulos (2009)- Economic growth is a precondition to stock market development taking into account thedecrease of inflation rate, interest rate, unemployment, taxation, and the increase of technologyand innovation.- It is common that in developed countries stock market development is affected positively byeconomic growth.- The aim of this study was to examine empirically the causal relations of the examined variablestrying to confirm the above theoretical hypotheses.