Macroeconomic Risk, Uncertainty and Financial Market Development: Emerging Markets Perspective

The study examines the effect of macroeconomic instability on financial market development among economies in the sub-region of sub-Saharan Africa (SSA) using a sample of 31 countries from 1996 to 2019. The study focuses on how composite macroeconomic risk index and uncertainty associated with key macroeconomic variables influence the pace of development of financial markets in the sub-region. Empirical estimates and analyses in this regard were performed using the two-step generalized method of moments (GMM) estimation technique. Results from the empirical estimates suggest that macroeconomic risk, inflation volatility and output growth volatility impede the development of financial markets among economies in the sub-region, holding all else constant. Further results show that improved governance and institutional quality may not be enough to assuage the negative impact of heightened macroeconomic risk and uncertainty on financial market development. Political instability, in contrast, is found to worsen the negative influence of macroeconomic risk and uncertainty on financial market development among economies in the SSA sub-region.