Nexus between Financial Liberalization and Financial Market Performance: A Testing of Convergence Hypothesis

Abstract

This paper investigates the impact of financial liberalization, economic growth, and political instability on financial market performance from 1990 to 2021. The dependent variable is financial market performance, while financial liberalization, economic growth, and political instability are treated as independent variables. Monetary and fiscal freedom are included as control variables. The study employs various empirical methods, including descriptive statistics, correlation matrices, panel least squares, and panel autoregressive distributed lag models. Monetary freedom exhibits a statistically insignificant negative effect on financial market performance. In contrast, fiscal freedom shows a strong negative correlation with financial market performance. Financial liberalization has a statistically significant positive effect on financial market performance. Economic growth also exerts a substantial positive impact on financial market performance. Political instability, however, has a statistically significant negative influence on financial market performance. These findings lend support to the convergence hypothesis. Policymakers must strike a balance between regulatory intervention and market autonomy. This can be achieved by implementing policies that promote fiscal freedom, eliminate unnecessary constraints on economic activity (particularly in the financial sector), and encourage greater financial sector openness. Additionally, policies should prioritize economic growth through investment promotion, support for innovation, facilitation of entrepreneurship, and infrastructure development.

Keywords: Financial liberalization, financial market performance, convergence hypothesis