Determinants of capital market in the new member EU countries

Abstract

The capital market is an important source of financing for viable investment projects and further economic development. Development of long-term financial markets is particularly important for transition EU countries, taking into account that stock markets in these countries did not start to operate until the mid-1990s. Despite legislation infrastructure quality, functional training and significant progress in market effectiveness, the capital market in many transition economies may be regarded as shallow, illiquid and nontransparent. At the same time, one can observe the strong development of 'institutional saving', i.e., financial development related to financial institutions like pension funds, investment funds, and insurance companies. The phenomenon of growth of institutional investors is especially important for capital markets in CEE transition countries, including the Republic of Croatia. The goal of this paper is to test the impulse of non-bank financial intermediaries' development, and also the influence of implementing the above-mentioned structure reform on capital markets development in the selected transition countries. By applying a panel data approach on a sample of six CEE countries over the period between 1995 and 2010, we provide further evidence on the specific determinants of emerging European capital markets.