The causal relationship between stock market development, bank development, Islamic and conventional insurance development, and economic growth: The Case of Malaysia

Abstract

This thesis examines the causal relationships among bank development, stock market development, conventional insurance, Islamic insurance, and economic growth in Malaysia using annual data for the period from 1975 to 2012. These relationships are studied a using multivariate VAR framework to evaluate long-run relationships among bank development, stock market development, conventional insurance, Islamic insurance, real gross domestic product (GDP) per capita, fixed capital formation (FCF), trade openness, and the consumer price index. The study also uses vector error correction model-based (VECM) causality tests to establish long- and short-run causality relationships among bank development, stock market development, conventional insurance, Islamic insurance, and economic growth. It uses four bank development indicators: the ratio of commercial bank assets divided by commercial bank plus central bank assets (BTOT), liquid liabilities (M3), domestic credit to the private sector (DCP), and bank deposit liabilities (LBDL). It further uses the total value traded ratio (VT), turnover ratio (TR), number of listed companies (LC), market capitalization (MC), and total capital raised in the primary market (IPOs) as indicators for stock market development. It also uses five variables representing conventional insurance, specifically gross premium income (life insurance), gross premium income (non-life insurance), life insurance penetration, non-life insurance penetration, and non-life insurance density, and three variables for Islamic insurance: assets of family takaful funds (AFTF), assets of general takaful funds (AGTF), and total contributions by participants in the family takaful (CPFT). The empirical results indicate that the direction of causality among bank development, stock market development, conventional and Islamic insurance, and economic growth in Malaysia is sensitive to the choice of proxy used for bank development, stock market development, conventional insurance, and Islamic insurance.