Do securitized derivatives increase market capitalization: an analysis for world stock exchange

Abstract

There is a strong relationship between economic growth and the stock market. On one side, all countries aim to improve their economic growth; on the other side, equity markets are affected by growth of economies, as a part of investment opportunities in their economy. Globalization of economy leads to the use of financial instruments in order to enjoy the benefits from equity markets. The main financial instruments are not sufficient in some economies; therefore, they need to use financial derivatives in their stock markets to remove financial obstructions, and to control the risks that are part of uncertainties in financial confusing risks. Do securitized derivatives increase market capitalization (equity market) in the globalization process? This question is the main motivation of this paper. In financial literature, market capitalization can be calculated by multiplying the total amount of common stocks and their market prices. This total market capitalization refers only to equity stocks, most companies and investors can invest their stocks; on the other hand, they may invest financial derivatives for important purposes. Mainly, two types of instruments take different positions in stock exchange; it is known that financial effectiveness is related to the amount of financial instruments. If one economy generates different types of financial instruments, it is expected that their stock exchange increases. In this paper, we analyzed the relationship between securitized financial derivatives and market capitalization in Spain, Germany, Holland, Sweden, Norway, Switzerland and Austria within the period from 2005 to 2015. Stock exchange of these countries was used since they have continuous data over the years. We estimated the relationship between variables using the panel regression model with fixed effects, which is tested by the Hausman Test. The panel regression model requires the data which contains both cross-sectional and time series structure. From the results, we determined a positive relationship between securitized derivatives and market capitalizations which is a statistically significant coefficient.