Economic growth and Bond market

Ramberto Jr. Sosa Cueto

Submitted in Partial Fulfilment

Of the Course Requirements
Capital Market
Fin 622

Master of Arts in Applied Economics

Fall 2016

0
Table of Contents
Introduction ................................................................................................................................ 2
I. Literature Review ............................................................................................................... 5
II. Economic growth and bond market link ................................................................. 8
III. Specification of econometric model ......................................................................... 9
IV. Data.................................................................................................................................. 11
V. Estimated Results, Documentation and Evaluation ............................................... 12
a) Unit root tests for stationarity ........................................................................................................ 12
b) Estimated model with OLS ............................................................................................................. 13
c) Cointegration test ............................................................................................................................ 14
d) Estimated error correction model by least squares ...................................................................... 14
e) VEC model residuals ........................................................................................................................ 15
Conclusion ................................................................................................................................. 16
Bibliography .............................................................................................................................. 18
Appendix I .................................................................................................................................. 19
Appendix II ................................................................................................................................ 20
Appendix III ............................................................................................................................... 21
Appendix IV ............................................................................................................................... 22
Appendix V ................................................................................................................................. 22
Appendix VI ............................................................................................................................... 23
Appendix VII.............................................................................................................................. 24
Appendix VIII ............................................................................................................................ 25

1
Introduction

This paper estimates an empirical model of the United States economic growth that

links economic activity to the bond market. “Financial development has been view as a key

to economic growth since the classical work of Schumpeter (1911). It promotes or speeds

economic growth through different channels. These include (1) providing information

about possible investments to distribute resources efficiently, (2) monitoring firms and

exerting corporate finance, (3) risk diversification, (4) easing the exchange of goods and

services, (5) mobilizing and pooling savings, and (5) technology transfers.”1

Most of the literature on asset markets and economic growth focus in two

institutions; banks and stock markets, with less attention to the bond market. In brief,

“there are two major reasons: first, bond financing is part of debt financing, which banks

dominates. Second, while in trades, stocks exchange for their equal and their price

discovery process can be analyzed by trading data. Bonds trades over-the-counters, where

transaction data are not transparent nor made publicly available, as equities.”2

Nonetheless, “in many countries (especially in Europe) the total amount of bond

outstanding is greater than that of credit provided by banks, and the size of the government

bond markets trump that of the stock markets. Even more, the bond markets are expected

to experience rapid growth worldwide. For instance, many countries now nurture their

1
Rudra P. Pradhan; Mak B. Arvin; Sara E. Bennett; Mahendhiran Nair; John H. Hall, “Bond Market Development,
Economic Growth and Other Macroeconomic Determinants: Panel Var Evidence,” Asia-Pacific Financial Markets 23,
no. 2 (2016): 176, accessed October 12, 2016, http://link.springer.com/article/10.1007/s10690-016-9214-x.
2
Thumrongvit, Patara; Kim, Yoonbai; Pyun, Chong Soo, “Linking the missing market: The effect of bond markets
on economic growth,” International Review of Economics and Finance27 (2013): 530, accessed October 11,
2016,http://dx.doi.org/10.1016/j.iref.2013.01.008.

2
domestic bond market as a defensive measure against the type of financial crises which

many Asian and Latin American countries faced in the 1990’s. Additionally, growing

numbers of affluent investors in developing countries are pouring their savings into bond

markets in search of high yield and portfolio diversification.”3

Although not all economist agrees in the degree of importance to financial markets

development, its contribution to economic growth is thoroughly hypothesized.

Additionally, there is evidence that supports the link. Empirically, there are two main

approaches to associate financial development and economic growth. For a start, there is

the production function approach. And second, the granger causality approach, which

examines the direction of causality between financial development and economic growth.4

The aim of this paper is to explore the causal relationship between the economic

growth and bond market. Secondly, measure in which proportion does the bond market

explains the economic growth. And lastly, test how the United States economy fits the

hypothesis in question.

Incidentally, “one may consider 4 possible hypotheses in the relationship between

the bond market and the real economic growth: (1) supply-leading; (2) demand-leading; (3)

feedback hypothesis; and (4) no causal relation. For example, the supply leading hypothesis

maintains that accumulation of financial assets triggers economic growth. Inversely, the

3
Thumrongvit, Patara; Kim, Yoonbai; Pyun, Chong Soo, “Linking the missing market: The effect of bond markets
on economic growth,” International Review of Economics and Finance27 (2013): 530, accessed October 11,
2016,http://dx.doi.org/10.1016/j.iref.2013.01.008.
4
Rudra P. Pradhan; Mak B. Arvin; Sara E. Bennett; Mahendhiran Nair; John H. Hall, “Bond Market Development,
Economic Growth and Other Macroeconomic Determinants: Panel Var Evidence,” Asia-Pacific Financial
Markets 23, no. 2 (2016): 176-177, accessed October 12, 2016, http://link.springer.com/article/10.1007/s10690-016-
9214-x.

3
demand-leading hypothesis assumes that real growth drives the emergence and

establishment of financial centers. In other words, the financial development is

endogenously determined by the real economy. Alternatively, the feedback hypothesis (or

interdependence hypothesis) implies that the causality goes both ways. Which suggests

that economic growth and financial development can complement and reinforce each

other. And last, it is also possible that development and economic growth are independent

of each other.”56

The structure of this paper goes as follows: Part I, is a literature review of the works

related to the bond market and economic growth relationship; Part II, discusses link,

economic growth-bond market; Part III, the specification of the econometric model; Part

IV, the discussion of the data; and last, Part V, the estimated results and evaluation.

5
Gerhard Fink; Peter Haiss; Sirma Hristoforova “Bond Markets and Economic Growth,” University of Economics
and Business Sdministration Vienna 49 (2003): 6.
6
Rudra P. Pradhan; Mak B. Arvin; Sara E. Bennett; Mahendhiran Nair; John H. Hall, “Bond Market Development,
Economic Growth and Other Macroeconomic Determinants: Panel Var Evidence,” Asia-Pacific Financial
Markets 23, no. 2 (2016): 177, accessed October 12, 2016, http://link.springer.com/article/10.1007/s10690-016-
9214-x.

4
I. Literature Review

“Most of the previous empirical studies which analyze the role of financial markets

on economic growth, have neglected the effect of bond market in the economic growth

process. The perception was that what matters is the state of a country’s financial

development as whole, and anything else was irrelevant as long as and the economy has

access to a well-functioning financial system. For instance, a well-functioning financial

system allows persons to cut transaction costs through hedging trading and pooling risk.

Also, it increases the liquidity and size of the capital markets, all which are essential for

economic growth. Specifically, financial markets promote economic growth through two

channels: a capital accumulation channel and a technological innovation. Further, the

financial market is divided into two broad sectors; banks and the stock market, as these

sectors provide complementary growth-enhancing financial services.”7

Overall, the works relating financial markets to economic growth have different

approaches and focus. And can be complementary with each other in the analysis. For

example, “Pagano (1993), argues that financial intermediation can affect economic growth

by acting on the saving rate, on the fraction of the saving channeled to investment, or on

the social marginal productivity of investment. Further, he notes that there are possible

cases where financial development negatively affect growth. Such as, improvements in risk-

sharing and in the household credit market, since the can decrease the saving rate, hence

7
Thumrongvit, Patara; Kim, Yoonbai; Pyun, Chong Soo, “Linking the missing market: The effect of bond markets
on economic growth,” International Review of Economics and Finance27 (2013): 529-41, accessed October 11,
2016,http://dx.doi.org/10.1016/j.iref.2013.01.008.

5
decrease growth. Also, Pagano theoretical analysis is within the context of the AK growth

model.”8

On the other hand, Harvey (1989), approach the financial markets and economic

growth from another perspective. In his paper, he uses forecasts of economic growth using

the bond market and stock market. Specifically, “his empirical work is based on the modern

asset pricing theories, which suggest a relationship between expected asset returns and

investors expected consumption plans. As formalized by Irving Fisher, in equilibrium, the

one-year interest rate reflects the marginal value of income today with its marginal value

next year. Hence, if a recession is expected next year, there is an incentive to postpone

present consumption to a buy a one-year bond that pays off in times of recession. As a

result, the demand for the bonds increases bidding its price up and lowering its yield.

Overall, Harvey suggests that the bond market has more information about economic

growth than the bond market. To illustrate, the evidence in his paper suggest that the yield

curve measures are able to explain more that 30 percent of the variation in economic

growth over the 1953-1989 period, while stock market variables explain only about 5

percent.” 9

From another point of view, Hakansson (1998) argues that well-developed corporate

bond market has a positive effect on an economy. For instance, “a well-developed corporate

bond market is associated with a significant degree of disintermediation and a well-

8
Marco Pagano, “Financial Markets and Growth,” European Economic Review 37 (1993): 621, accessed October 11,
2016,http://www.csef.it/pagano/eer-1993.pdf.
9
Campbell R. Harvey, “Forecasts of Economic Growth from the Bond and Stock Markets,” Financial Analysts
Journal 45, no. 5 (Sep. - Oct., 1989): 38, 39, 44, accessed October 11, 2016,http://www.jstor.org/stable/4479257.

6
functioning market in derivatives. Also, in a well-developed, the lending process is free

from government intervention. Further, the argument suggests that when the relative sizes

of the banking system and the corporate bond market are balanced; and there is a well-

developed corporate bond market, market forces have a greater opportunity to assert

themselves, thereby reducing systematic risk and the probability of a crisis.”10

Further, Fink, Haiss, and Hritoforova (2003); “presents evidence on the relationship

between bond markets and real economic growth in the EU15, USA, Japan, Switzerland and

Norway. The estimated models support the supply-leading hypothesis implying that real

economic activity is significantly affected by the development of the bonds market over the

1950 to 2000, time period.” 11Additionally, “Thumarongvit, Kim, Pyun (2013); “shows that

the relationship between corporate bond market development and economic growth

changes from negative, in the study period of 1989 to 2003, to a positive for a study period

from 1989 to 2010. They argue that the expanded bond market together with advance in

economy’s financial structure contributed to economic growth through technological

innovations and enhanced labor productivity in the private sector.”12

Pradahan, Arvin, Bennett, Nair, and Hall (2016); “In their work maintain that bond

market development side-by- side with other key macroeconomic variables may be

10
Nils H. Hakansson, “He Role of a Corporate Bond Market in an Economy – and in Avoiding Crises,” University
of California, Berkeley (1998): 2, 13, accessed October 11,
2016,http://www.haas.berkeley.edu/groups/finance/WP/rpf287.pdf.
11
Gerhard Fink; Peter Haiss; Sirma Hristoforova “Bond Markets and Economic Growth,” University of Economics
and Business Sdministration Vienna 49 (2003): 1.

12
Thumrongvit, Patara; Kim, Yoonbai; Pyun, Chong Soo, “Linking the missing market: The effect of bond markets
on economic growth,” International Review of Economics and Finance27 (2013): 529-41, accessed October 11,
2016,http://dx.doi.org/10.1016/j.iref.2013.01.008.

7
important to economic growth. Bond market development not only reduces the

transaction costs through hedging, trading and burnishing risks, but also increases the

liquidity and the size of the capital markets, all of which are essential for economic growth.

Their Granger causality test confirms that bond market development and four other

macroeconomic covariates may be long-run causes for economic growth. Also, their results

demonstrate that studies on economic growth that do not consider bond market

development, will offer potentially biased results from a policy perspective, since higher

and more developed bond market lead to higher economic growth.”13

II. Economic growth and bond market link

“The bond market is essential for an efficient functioning of capital markets.

Specifically, it channels savings. Thus, it makes funds available to long-term borrowers. In

the process, it sets the benchmark interest rates for debt instruments with varying

maturities and risks. Both maturities and risk serve as indicators for the household decision

to save and lend and business decisions to borrow and invest for long-term projects. In

particular, this is important to the link between economic growth and bond market

because long-term financing is essential to productivity gains in an economy.”14

Further, in the process of transforming saving into investment, financial

intermediaries absorb resources. For instance, part of the resources goes to banks as the

13
Rudra P. Pradhan; Mak B. Arvin; Sara E. Bennett; Mahendhiran Nair; John H. Hall, “Bond Market Development,
Economic Growth and Other Macroeconomic Determinants: Panel Var Evidence,” Asia-Pacific Financial Markets 23,
no. 2 (2016): 175-201, accessed October 12, 2016, http://link.springer.com/article/10.1007/s10690-016-9214-x.
14
Thumrongvit, Patara; Kim, Yoonbai; Pyun, Chong Soo, “Linking the missing market: The effect of bond markets
on economic growth,” International Review of Economics and Finance27 (2013): 531, accessed October 11,
2016,http://dx.doi.org/10.1016/j.iref.2013.01.008.

8
spread between lending and borrowing, and to securities brokers and dealers as fees,

commissions etc. In other words, financial intermediaries do not allow the investment and

saving equality. Thus, if bond markets cut this leakage of resources, it also raises the

amount of savings that goes to investment and increases the economy growth rate.15

Particularly, the corporate bond markets reduce the friction and cost of

intermediation between issuers and investors. Even more, promotes efficient

diversification and allocation of available funds in the economy to the most productive

sectors.16

III. Specification of econometric model

Specifically, this paper examines the causal relationship between the between the

bond market growth and the real economic growth for the United States economy over the

time period 1969:02-2016:02. The direction of the causality is important for policy

implications. For example, if the bond market growth leads to capital accumulation, policy-

makers might want to encourage the bond market growth. Formally, to find the long-run

equilibrium relationship:17

𝑦𝑡 = 𝛽1 𝑏𝑡 + 𝑒𝑡 (𝟏)

15
Marco Pagano, “Financial Markets and Growth,” European Economic Review 37 (1993): 615, accessed October
11, 2016,http://www.csef.it/pagano/eer-1993.pdf.
16
“Economic Importance of Corporate Bond Market,” International Capital Market Association, March, 2013: 14.
www.icmagroup.org.
17
Gerhard Fink; Peter Haiss; Sirma Hristoforova “Bond Markets and Economic Growth,” University of Economics
and Business Sdministration Vienna 49 (2003): 16.

9
Where:

yt: the real economic growth in period t [Billions of chained (2009) dollars].

bt: the relative change in bond market size in period t [Billions of chained (2009) dollars].

𝜷𝟏 : is the elasticity of yt with respect to bt.

𝒆𝒕 : The residual.

The hypothesis test goes as follows:

H0: 𝛽1≤0, case it is not statically significant.

H1: 𝛽1＞0, case it is statically significant.

The model implies that when the bond market size increases, the real GDP

increases. However, it is possible that bond market size relative change and real economic

growth are simultaneously determined. Due to, “to explore the relationship between pairs

of time-series variables one must discuss a vector error correction (VEC) or vector

autoregressive (VAR) models. The VEC model applies when there is cointegration between

I (1) variables and the VAR model when there is no cointegration.”18

If one Assumes that yt and bt are “I(1)” in equation (1) and the residuals are stationary.

A straightforward method is to use a two-step least squares procedure. First, use the least

squares method to estimate the cointegrating relationship in “𝑦𝑡 = 𝛽0 + 𝛽1 𝑏𝑡 + 𝑒𝑡 " and

generate the lagged residuals 𝑒̂𝑡−1 = 𝑦𝑡−1 − 𝛽0 − 𝛽1 𝑏𝑡 . Second, use least squares to

estimate the equations:19

𝑦
∆𝑦𝑡 = 𝛼10 + 𝛼10 𝑒̂𝑡−1 + 𝑣𝑡 (𝟐)

∆𝑥𝑡 = 𝛼20 + 𝛼21 𝑒̂𝑡−1 + 𝑣𝑡𝑥 (𝟑)

18
R Carter Hill, William E. Griffiths, and G C. Lim, Principles of Econometrics, 4th ed. (Hoboken, NJ: Wiley, ©2011), 499.
19
R Carter Hill, William E. Griffiths, and G C. Lim, Principles of Econometrics, 4th ed. (Hoboken, NJ: Wiley, ©2011), 500.

10
 For instance, the VEC model allows us to see how much economic growth will

change in response to a change in the explanatory variable (the cointegration part, “𝑦𝑡 =

𝛽0 + 𝛽1 𝑏𝑡 + 𝑒𝑡 "), as well as the speed of the change (the error correction part, “∆𝑦𝑡 = 𝛼10 +
𝑦
𝛼10 𝑒̂𝑡−1 + 𝑣𝑡 " where 𝑒̂𝑡−1 is the cointegrating error. 20

Additionally, the hypothesis test for the estimators will be base on a p-value of 5%.

Consequently, for the results to be statistically significant the p-value must be less than 5%.

Due to, the chance of committing a Type-I error will be 5%.

IV. Data

Specifically, the source of the data for real economic growth and bond market size

are from Department of Commerce, Bureau of Economic Analysis, and the Federal Reserve

Bank of St. Louis. The analysis range is the period 1969:2-2016:2, quarterly data.

For start, the real economic growth is measured as the relative change in the the real

gross domestic product. the time series is seasonally adjusted at annul rates. Also, it is in

billions of chained (2009) dollars. On the other hand, the bond market size proxy is the

total debt securities for all sectors. The time series is deflated using the GDP implicit price

deflator, with the base period 2009. And lastly, it is use to measure its relative chance (or

growth). (see Time series plot, Appendix I)

20
R Carter Hill, William E. Griffiths, and G C. Lim, Principles of Econometrics, 4th ed. (Hoboken, NJ: Wiley, ©2011), 500.

11
V. Estimated Results, Documentation and Evaluation

a) Unit root tests for stationarity

“The main reason we prefer stationary time series variables in the regression analysis is

to avoid any significant results from unrelated data. In other words, a spurious regression.

Formally, a time series is stationary if its mean and variance are constant over time, and if

the covariance between two values from the series depends only on the length of time

separating the two values.”21

Specifically, the time series are tested using the ADF and Phillips-Perron test. The

results show that for all the time series in the model, the test statistics are greater than the

5% critical value. Thus, the time series are stationary. (See Unit root tests, Appendix II)

21
R Carter Hill, William E. Griffiths, and G C. Lim, Principles of Econometrics, 4th ed. (Hoboken, NJ: Wiley, ©2011), 482,
477.

12
 b) Estimated model with OLS

According to STATA the estimated model using the ordinary least square with Newey-

West standard errors is the following:

𝑦̂𝑡 = 1.3844(𝑏𝑡 )
𝑠𝑒(𝛽̂𝑖 ) = (0.1774286)
𝑡= (7.80)
𝑃 > |𝑡| = (0.000)
𝑅 − 𝑠𝑞𝑢𝑎𝑟𝑒 = 0.3547 𝑛 = 189

the results show that the elasticity of bond market capitalization growth with respect to

economic growth is statically significant since the p-value is less than 5% significance level.

Also, the model predicts that each additional 1% growth in the bond market, the US

economy grows by 1.3844%. With regard to the hypothesize, the estimated model agrees

with the fact that economics growth and the bond market capitalization growth have a

positive relationship.

For instance, the model is estimated using the Newey-West standard errors. The

method is used to correct issues such as serial correlation, normality, and

heteroskedasticity. For example, Serial correlation refers to the Gauss-Markov theorem

assumption, 𝑐𝑜𝑣(𝑒𝑡 , 𝑒𝑠 ) = 0 (for t different that s). When the assumption is not satisfied,

the OLS no longer is minimum variance, and hypothesis testing unreliable. On the other,

In the regression analysis, the normality in the residual enables us to derive reliable

probability distributions of the estimated parameters and the estimated standard error.

Which simplifies the task of establishing confidence intervals and testing hypotheses.

Specifically, in this paper, we use Bartlett’s formula to test serial correlation and the

skewness/kurtosis to test normality in the residuals. The results show that many of the

13
residuals are serially correlated. However, there is not enough evidence to reject the

normality hypothesis.

(See Estimated model, Cointegration test, Normality test, serial correlation test and

Newey-West standard errors in Appendix III , Appendix IV, and Appendix V)

c) Cointegration test

According to the Engle-Granger Test, the residuals derive from the estimated model

are stationary and thus cointegrated. This result implies that economic growth is linked to

bond market capitalization growth in the long-run.

In the following section, we estimate the error correction model by least squares to

find out how much is the response of economic growth in a quarter to the bond market

growth. (See Cointegration test Appendix III)

d) Estimated error correction model by least squares

The estimated model for {yt, bt} is:

∆𝑦𝑡 = 0.3000696 − 0.2300899𝑒̂𝑡−1 (𝟏)

𝑒(𝛽̂
𝑖 ) = (0.0840421) (0.0424096)
𝑡= (3.57) (−5.47)
𝑃 > |𝑡| = (0.000) (0.000)
𝑅 − 𝑠𝑞𝑢𝑎𝑟𝑒 = 0.1387 𝑛 = 188

∆𝑏𝑡 = −0.3854015 + 0.3009011𝑒̂𝑡−1 (𝟐)

𝑒(𝛽̂
𝑖 ) = (0.0802782) (0.1774286)
𝑡= (−4.80) (7.80)
𝑃 > |𝑡| = (0.000) (0.000)
𝑅 − 𝑠𝑞𝑢𝑎𝑟𝑒 = 0.2288 𝑛 = 188

The negative error correction coefficient in the first equation (-0.2300899) indicates

that ∆y falls, when there is a positive cointegrating error. While the positive error

correction coefficient in the second equation indicates that ∆b rises, when there is a

14
positive cointegrating error. This behavior “corrects” the cointegrating error. The error

correction coefficient (-0.2300899) is significant at the 5% level; it indicates that the

quarterly adjustment of yt will be about 16.57% of the deviation of yt-1 from its cointegrating

value 1.3844 bt-1. This is a slow rate of adjustment. Also, the error correction coefficient in

the second equation (0.300911) is significant; it suggests that ∆b also reacts to the

cointegrating error. Thus, the result is inconsistent with the supply-leading hypothesis

which maintains that accumulation of financial assets triggers economic growth; and also

deviates from the demand-leading hypothesis which maintains that economic growth

triggers the bond market development. In contrast, the results show evidence of the

feedback hypothesis (or interdependence hypothesis) which implies that the causality goes

both ways. And hence that economic growth and financial development can complement

and reinforce each other.22 (See results in Appendix VI)

e) VEC model residuals

Further, the VEC model residuals presents evidence of serial correlation according to

the Bartlett’s formula to test of serial correlation. Also, the probability of skewness in both

models is greater than 5%. However, according to the Newey-West standard errors the

coefficients remains significant at a 5% significant level. (See results in Appendix VII and

Appendix VIII)

22
R Carter Hill, William E. Griffiths, and G C. Lim, Principles of Econometrics, 4th ed. (Hoboken, NJ: Wiley, ©2011), 503.

15
Conclusion

In summary, financial development has been analyzed as a key to economic growth.

According to earlier works, it promotes or speeds economic growth through different

channels. These include (1) providing information about possible investments to distribute

resources efficiently, (2) monitoring firms and exerting corporate finance, (3) risk

diversification, (4) easing the exchange of goods and services, (5) mobilizing and pooling

savings, and (5) technology transfers.

However, most of the literature on asset markets and economic growth focus in

banks and stock markets. Nonetheless, the size of the government bond markets is great

then that of the stock markets. Also, many paper suggest that the bond market is a good

predictor of economic activity while the stock market an unreliable predictor. The degree

of importance to financial markets development, and its contribution to economic growth

is thoroughly hypothesized. Specifically, in this paper we use econometric tools to analyze

the causal relationship between economic growth and the bond market capitalization

growth.

For the purpose of one may consider 4 possible hypotheses in the relationship

between the bond market and the real economic growth: (1) supply-leading; (2) demand-

leading; (3) feedback hypothesis; and (4) no causal relation. According to the results, there

is evidence of the feedback hypothesis. That is, both economic growth and bond market

capitalization relative change are simultaneously determine in the sample period of 1969:2-

2016:2 for the U.S. economy. This results, contrast the other hypothesis of (1) supply-

leading; (2) demand-leading; and (4) no causal relation.

16
 Specifically, the first estimated model implied that the elasticity of bond market

capitalization growth with respect to economic growth is statically significant at a 5%

significance level. Also, it predicts that each additional 1% growth in the bond market, the

US economy grows by 1.3844%. The estimated model agrees with the fact that economics

growth and the bond market capitalization growth have a positive relationship. However,

the VEC model shows that in the short-run the rate of adjustment is slow. It indicates that

the quarterly adjustment of yt will be about 16.57% of the deviation of yt-1 from its

cointegrating value 1.3844%. Further, the model suggest that the causality goes both ways.

In sum, the link between economic growth and bond market capitalization is one

which major controversies. For instance, in this analysis, the bond market is studied as a

whole without distinction from government and corporate bonds. It is possible that the

results are much different when such distinction is made. Evermore, the literature is

divided on the directional causality of the three major financial markets; banking, bond

and equity stick that have on economic growth. Which implies that financial development

effect on economic growth is subject to the type financial market in development. With the

purpose to shed light on the problematic, the empirical literature in the subject tries to

combine the endogenous growth theory and the micro structure of financial systems,

however, both studies still are undergoing major development.

17
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Boston: McGraw-Hill Irwin, ©2004.

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 Appendix I

Real economic growth & Total debt securities for all sectors.
1962:02 to 2016:02

Differences for Real economic growth & Total debt securities for all sectors.
1962:02 to 2016:02

Source: Compiled by author with data from BEA and Federal Reserve Bank of St. Louis.

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 Appendix II
Stationarity test: ADF test

Stationarity tests: Phillips-Perron test

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 Appendix III
Regression Analysis: Real economic growth vs Bond market capitalization relative change

Engle-Granger Test for cointegration

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 Appendix IV
Serial Correlation test

Appendix V
Newey-West standard errors

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 Appendix VI
VEC models

Real economic growth (difference) regressed on the error correction variable

Bond market capitalization relative (difference) change regressed on the error correction
variable

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 Appendix VII

Normality test: Jarque-Bera test for the models residuals

Serial correlation test for Real economic growth (difference) regressed on the error
correction variable

Serial correlation test for Bond market capitalization relative (difference) change
regressed on the error correction variable

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 Appendix VIII
Newey-West standard errors

Real economic growth (difference) regressed on the error correction variable

Bond market capitalization relative (difference) change regressed on the error correction
variable

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