Stock market development and environmental quality in EU member countries: a dynamic heterogeneous approach

Studies on the determinants of environmental quality in the European Union (EU) are plentiful. However, to the best of my knowledge, there has been no research on the linkage between stock market development and environmental quality in the EU, while controlling for natural resource rents, trade openness and energy consumption at the same time. This study aided in filling the above gap using a panel data of 17 EU member countries from 1995 to 2014. In attaining the above goal, second and third generation econometric techniques that control for slope heterogeneity, cross-sectional dependence and structural breaks among others were employed for the analysis. From the cross-sectional dependence test, there were correlations in the residual terms. Also, the heterogeneity test affirmed the slope parameters to be heterogeneous in nature. Moreover, the unit root tests confirmed the series to be stationary, while the cointegration tests found the variables to be significantly related in the long run. The cross-sectional autoregressive distributed lag, Cross-sectionally augmented distributed lag and the cross-sectional augmented error correction estimators were used to explore the elasticities of the predictors, and from the results, stock market development improved environmental quality by mitigating ecological footprint. Besides, natural resource rents, trade openness and energy utilization deteriorated the ecosystem of the studied nations. On the causalities between the variables, there was no causation between stock market development and ecological pollution. However, bilateral causalities between natural resource rents and environmental degradation and between energy utilization and ecological pollution were unfolded. Finally, a causation from trade openness to ecological pollution was disclosed. Based on the findings, it was recommended among others that policymakers should force all listed entities to adopt greener practices in their operations. This could help to reduce the escalating rate of pollution in the region.