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Monetary Risk and Market Dynamics as Drivers of Capital Market

Deepening in ASEAN: A Sustainable Development Perspective
Abstract

This study investigates the drivers of capital market deepening in ASEAN countries from a
sustainable development perspective. It focuses on the influence of stock market returns,
GDP growth rate, inflation rate, and IPO activity on the market capitalization-to-GDP
ratio. Using a panel dataset covering six ASEAN countries from 2010 to 2024, the study
applies the System Generalized Method of Moments (System GMM) to account for
endogeneity and dynamic effects. The results reveal that stock market returns and inflation
rate have a significant positive impact on capital market deepening, while GDP growth
rate and IPO count do not show significant effects. These findings highlight the importance
of financial market performance and monetary conditions in enhancing financial depth in
emerging markets. The study offers valuable insights for policymakers aiming to strengthen
capital markets as a means of supporting inclusive and sustainable economic development
in the ASEAN region.
Article Info
• Received :
• Revised :
• Published :
• Pages :
• DOI :
• JEL : G15, E44, O16
• Keywords : Stock Market Return, GDP Growth Rate, Inflation Rate, IPO Count,
Market Capitalization

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1. Introduction
The increasing integration of global financial markets and the ongoing pursuit of
sustainable development have encouraged emerging economies to strengthen their domestic
capital market infrastructure. (Abraham et al., 2020) In the ASEAN region, capital market
deepening has become a strategic priority not only to accelerate economic growth but also
as a mechanism to support the implementation of the Sustainable Development Goals
(SDGs) . Capital market deepening reflects a financial system's ability to mobilize domestic
savings and allocate them efficiently to productive sectors, thereby serving as a key channel
for long-term development financing (Arner et al., 2020; Ibrahim et al., 2020). In the midst
of global uncertainties, two critical factors influencing the stability and growth of capital
markets are monetary risk often represented by inflation rates and exchange rate volatility
and market dynamics, such as stock return performance and capital mobilization activities
(Koranteng & You, 2024; Odionye et al., 2023).
According to Bansal et al. (2021), from a sustainable development perspective,
capital market metrics such as equity returns, market capitalization, financial market depth,
and the volume of initial public offerings (IPOs) are frequently employed as reliable
proxies to assess the structural sophistication and operational maturity of a nation’s
financial system. These indicators not only provide critical insights into the strength and
resilience of capital market infrastructure, but also serve as integral instruments for
measuring progress toward broader development objectives. In particular, they contribute
meaningfully to the realization of several key Sustainable Development Goals (SDGs),
including SDG 8, which focuses on fostering inclusive and sustainable economic growth
and employment; SDG 9, which emphasizes innovation, industrial development, and robust
infrastructure; and SDG 17, which underscores the importance of global partnerships and
coordinated policy implementation.
Moreover, inflationary volatility remains a critical factor that can erode investor trust,
weaken the attractiveness of capital markets, and disrupt capital mobilization efforts. In
contrast, positive performance in equity markets, as reflected in healthy stock returns, tends
to stimulate investor engagement and enhances the market’s capacity to allocate financial
resources efficiently and productively (Lepetit, 2023). Consequently, a nuanced and
empirically grounded analysis is needed to explore the role of macro-financial risks
particularly inflationary pressures and investor sentiment in driving capital market
deepening across ASEAN countries. This is especially vital for emerging economies within
the region, which continue to face institutional and structural limitations while striving to
align their financial strategies with long-term sustainable development goals.
Amid the growing recognition of the pivotal role that deep and resilient capital
markets play in economic development, many emerging ASEAN economies continue to
grapple with entrenched structural challenges. The ASEAN Investment Report (2024)
highlights that over 32% of regional enterprises perceive financial instability particularly
inflation volatility and currency depreciation as a major impediment to attracting long-term
investment and fostering investor confidence. These concerns materialized sharply in early

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2025, when Southeast Asian markets experienced capital outflows amounting to

approximately USD 4.16 billion in just the first quarter, driven by global inflation shocks
and tighter monetary policy in advanced economies (Reuters, 2025).
At the same time, domestic participation in capital markets is rising. For instance,
Indonesia recorded more than 15 million retail investors by the end of 2024, and its market
capitalization approached USD 881 billion, equivalent to 45% of its GDP—an indicator of
significant latent potential for internal resource mobilization (OECD, 2024). However,
persistent institutional fragility, fragmented financial oversight, and the absence of cohesive
cross border regulatory alignment continue to hinder the region’s financial deepening
(ASEAN Secretariat, 2025). These empirical realities underscore the necessity for a
comprehensive analytical approach that investigates how macroeconomic variables
particularly inflation dynamics, investor behavior, and capital formation interact in shaping
the development of capital markets across ASEAN. Such insights are essential not only for
advancing scholarly discourse but also for informing coherent and effective regional policy
responses.
While the relationship between financial development and macroeconomic
performance has been widely examined, limited attention has been paid to the combined
role of market return, inflation risk, and capital formation activity in shaping capital market
depth particularly in the ASEAN emerging markets (Haini, 2019; Marwa et al., 2022).
Existing literature often isolates these indicators or embeds them in broader macro finance
frameworks without specifically assessing their interactive effects on market capitalization
expansion (Abraham et al., 2020). Moreover, few empirical studies directly evaluate capital
market deepening as a function of capital mobilization events and investor expectations,
despite their relevance in understanding market confidence and financial sustainability
(Adoms et al., 2020; Yang et al., 2023). In the context of the Sustainable Development
Goals (SDGs), this constitutes a critical gap, as well-functioning capital markets are
increasingly viewed as instruments to mobilize long-term funding aligned with inclusive
and sustainable growth.
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Indonesia Malaysia Philippines Singapore Thailand Vietnam
2024 2024 2024 2024 2024 2024

StockMarketReturn GDPGrowthRate inflationrate

ipocount MarketCapGDP
Figure 1. Macro Financial Indicators and Market Cap GDP in ASEAN 6 (2024)

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In 2024, capital market indicators across six ASEAN countries showed diverse
patterns. Vietnam led with the highest stock market return (9.5%) and GDP growth
(7.09%), but recorded the lowest IPO activity (1) and a relatively moderate market
capitalization-to-GDP ratio (65%). Indonesia and Malaysia posted negative returns (-7%
and -6%), though Malaysia had the highest IPO count (55) and a strong market depth
(93%). Singapore and Thailand showed modest growth (2%) but maintained deep markets,
with Market Cap GDP at 118.4% and 100%, respectively. The Philippines saw moderate
growth (6%) and stable inflation (3%), but low IPO activity (3). These figures highlight the
structural disparities in market performance, mobilization, and depth across ASEAN,
despite shared regional development goals.
To address this gap, this study adopts a dynamic panel estimation approach using the
System GMM (Generalized Method of Moments) technique to evaluate the effect of stock
market returns, GDP growth, inflation rates, and IPO activity on capital market deepening,
measured by the market capitalization to GDP ratio (Ishioro & Tarurhor, 2022) . The
exclusion of policy or event-related dummy variables allows the analysis to focus on the
structural financial-economic linkages, rather than episodic shocks (Asiedu et al., 2021). By
integrating core indicators of market sentiment, macroeconomic performance, monetary
stability, and capital formation, this research aims to clarify the endogenous drivers of
capital market development in ASEAN countries within a sustainable development
framework. The results are expected to offer policy-relevant insights for enhancing
financial depth and resilience in emerging markets pursuing SDG-aligned growth.
Recent studies have highlighted the significance of market dynamics and
macroeconomic factors in influencing capital market development in ASEAN countries.
The OECD (2024) emphasizes that robust capital markets are essential for mobilizing
resources to achieve sustainable growth, noting the importance of equity and bond markets
in financing corporate investments and infrastructure projects. Similarly, McKinsey (2017)
identifies The advancement of more sophisticated and deeper capital markets across
emerging Asian economies holds the potential to significantly enhance access to long-term
financing for medium and large scale enterprises, as well as critical infrastructure projects.
Such financial deepening is expected to play a pivotal role in accelerating economic growth
by facilitating efficient capital allocation and fostering investor confidence. Within this
framework, the development of stock markets becomes a key mechanism for mobilizing
domestic savings, improving corporate transparency, and supporting broader
macroeconomic stability, Shi et al. (2021) find that institutional quality, including sound
monetary policies and regulatory frameworks, significantly affects stock market
development and price volatility in ASEAN countries. Furthermore, the ASEAN
Exchanges report (2024) provides empirical data showing variations in market
capitalization and IPO activities across ASEAN nations, reflecting differing levels of
market maturity and investor confidence. These findings underscore the multifaceted nature
of capital market deepening, influenced by both market performance indicators and
macroeconomic stability.

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While previous studies have explored the relationship between financial development
and macroeconomic performance, there is a notable gap in the literature concerning the
combined impact of market returns, inflation risk, and capital formation activities on capital
market deepening within the ASEAN context (Mail et al., 2020; Setiawan et al., 2020).
Existing research often examines these factors in isolation or within broader macro-
financial frameworks, lacking a focused analysis on their interactive effects on market
capitalization expansion (Mulatsih et al., 2023). Moreover, few empirical studies have
directly assessed capital market deepening as a function of capital mobilization events and
investor expectations, despite their relevance in understanding market confidence and
financial sustainability (Adoms et al., 2020; Qizam, 2021). This gap is particularly
significant in the context of the Sustainable Development Goals (SDGs), where well-
functioning capital markets are increasingly recognized as instruments to mobilize long-
term funding aligned with inclusive and sustainable growth.
This research seeks to address a critical gap in the literature by examining, through
empirical analysis, the extent to which monetary risks and market dynamics contribute to
capital market deepening within ASEAN economies a subject that remains relatively
understudied, particularly in the context of advancing sustainable development. Distinct
from many earlier studies that often evaluate financial indicators in isolation or rely heavily
on static analytical models, this study adopts a System Generalized Method of Moments
(System GMM) approach. This advanced econometric technique captures the complex and
evolving interactions between key macroeconomic variables and financial development
indicators over time and across countries.
The innovative contribution of this study lies in its integration of diverse but
interconnected variables namely stock market returns, GDP growth, inflation, and IPO
activity into a single dynamic panel model. By doing so, it not only sheds light on the
mechanics of capital market expansion but also frames its analysis within the broader
narrative of achieving the Sustainable Development Goals (SDGs). The methodological
strength of the System GMM lies in its ability to mitigate common empirical challenges,
such as endogeneity and autocorrelation, while incorporating lagged dependent variables to
explore structural persistence and inertia within financial systems in emerging markets.
From a policy standpoint, the study generates evidence-based insights that are highly
relevant for stakeholders such as financial regulators, central banks, and development
agencies. By pinpointing which macroeconomic levers exert the most significant influence
on fostering deeper, more inclusive, and more resilient capital markets, the research offers
practical guidance for policy formulation. This is particularly timely for ASEAN countries
working to harmonize financial sector growth with their national sustainability agendas.
The findings are aligned with key global goals, including SDG 8 (promoting inclusive and
sustained economic growth and decent work), SDG 9 (supporting innovation,
industrialization, and robust infrastructure), and SDG 10 (reducing inequality and
enhancing social inclusion across populations).

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2. Literature Review
The Sustainable Development Theory (SDT), introduced in the Brundtland Report
(1987), defines sustainable development as the pursuit of fulfilling present needs without
compromising the capacity of future generations to meet theirs. This theory emphasizes a
balanced approach that harmonizes economic progress, social equity, and environmental
stewardship. Within the sphere of capital markets, SDT highlights the critical role of
financial systems in channeling resources to support the achievement of the Sustainable
Development Goals (SDGs). A well-developed capital market, often measured through the
market capitalization-to-GDP ratio (Market Cap GDP), reflects a country’s ability to
allocate resources efficiently and mobilize domestic savings toward productive investments
(Jahan et al., 2019). Such markets play a pivotal role in financing infrastructure and
fostering innovation, directly contributing to SDG 9 (Industry, Innovation, and
Infrastructure) (Günay & Can, 2022). At the same time, they provide businesses with
platforms to raise capital, stimulating entrepreneurship, job creation, and inclusive
economic growth aligned with SDG 8 (Decent Work and Economic Growth) (Ibrahim et
al., 2020). Furthermore, the collaborative nature of capital markets, which inherently
involves governments, private sectors, and international stakeholders, resonates with the
partnership-oriented ethos of SDG 17 (Partnerships for the Goals) (Stoian & Iorgulescu,
2019; Akenten et al., 2020). Therefore, capital market deepening serves not only as a
financial mechanism but also as a strategic instrument for achieving long-term
sustainability objectives.
Financial Market Theory of Development posits that well-regulated financial markets
are instrumental in channeling private capital flows to spur domestic economic
development, especially in developing countries (Puschmann et al., 2020). This theory
suggests that by providing access to equity and debt financing, capital markets can reduce
reliance on traditional aid and loans, thereby accelerating economic growth and fostering
entrepreneurship. Financial deepening refers to the increased provision of financial services
with a wider choice of financial instruments (Dutta & Meierrieks, 2021). Empirical studies
have established a positive relationship between financial deepening and economic growth,
indicating that a more developed financial sector can lead to higher economic performance
(Soedarmono et al., 2016). In emerging economies, deepening capital markets can mobilize
savings, improve investment allocation, and enhance risk management, thereby
contributing to sustainable economic development.
The Relationship Between Stock Market Returns and Market Capitalization-to-GDP
Ratio
Stock market returns serve as a barometer of investor sentiment and economic
vitality. In emerging economies like those in the ASEAN region, higher stock market
returns often signal robust investor confidence, leading to increased investment and an
expansion of market capitalization relative to GDP.
Empirical evidence has consistently demonstrated a strong and positive association
between the advancement of stock markets and the trajectory of economic growth in high-

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income nations, where this linkage tends to be reciprocal. In these contexts, economic
expansion not only benefits from robust capital markets but also actively contributes to
their further development. However, the pattern appears to diverge in middle-income
economies, where the relationship is more commonly observed as unidirectional—stock
market progress tends to stimulate economic growth, yet the reverse effect is comparatively
limited. This asymmetry may reflect structural differences such as underdeveloped
financial infrastructure, limited investor engagement, and weaker institutional frameworks,
which collectively constrain the feedback loop from macroeconomic performance to capital
market maturation.
Moreover, rising stock prices enhance firms' net worth, improving their balance
sheets and reducing borrowing constraints. This facilitates greater investment and
contributes to economic growth. For instance, in Indonesia, the stock market capitalization
accounted for 45.2% of its nominal GDP in December 2020, indicating a significant role of
the stock market in the country's economy. In the context of the Sustainable Development
Goals (SDGs), vibrant stock markets can mobilize capital towards sustainable initiatives.
The United Nations emphasizes the role of capital markets in financing the SDGs,
highlighting that well-functioning stock markets can attract investments into sectors critical
for sustainable development.
In summary, stock market returns play a crucial role in capital market deepening by
boosting investor confidence, enhancing corporate financial health, and fostering economic
growth, thereby increasing the Market Cap GDP ratio. This dynamic is essential for
ASEAN countries aiming to achieve SDG-aligned growth.
H1: There is a positive and significant relationship between stock market returns and the
market capitalization to GDP ratio in ASEAN countries.
The Relationship Between GDP Growth Rate and Market Capitalization to GDP
Ratio
The GDP growth rate is widely regarded as a core indicator of a nation’s economic
strength and capacity for expansion. Within the ASEAN context, periods of robust GDP
growth are typically associated with rising corporate earnings and strengthened investor
confidence (Asmarani & Ningsih, 2023). This positive economic momentum often
translates into higher stock valuations, which in turn elevate the market capitalization-to-
GDP (Market Cap GDP) ratio, reflecting deeper capital market development. The
relationship between GDP growth and market capitalization is particularly relevant in
advancing the Sustainable Development Goals (SDGs). In particular, SDG 8 (Decent Work
and Economic Growth) underscores the importance of sustained economic expansion and
the creation of productive employment opportunities (Căpraru et al., 2018; Lee & Goh,
2023). A well-functioning capital market, signaled by a strong Market Cap GDP ratio,
serves as a key conduit for mobilizing financial resources toward infrastructure, innovation,
and entrepreneurship—critical drivers of sustainable economic transformation (Asiedu et
al., 2021). Thus, GDP growth not only reflects macroeconomic vitality but also acts as an
enabler of broader developmental objectives when supported by efficient and inclusive
capital markets.

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Moreover, a study examining the mediating role of market capitalization in the

relationship between economic growth and macroeconomic variables across twenty
countries found that market capitalization partially mediates this relationship (Setiawan et
al., 2020; Hossin & Hamid, 2021). This suggests that as GDP grows, it not only directly
influences economic development but also indirectly does so by enhancing market
capitalization, which in turn attracts further investment and promotes financial sector
development. A robust GDP growth rate is intrinsically linked to an elevated Market Cap
GDP ratio in ASEAN countries. This relationship not only reflects the economic health of a
nation but also plays a pivotal role in achieving broader developmental objectives aligned
with the SDGs.
H2: There is a positive and significant relationship between GDP growth rate and the
market capitalization to GDP ratio in ASEAN countries.
The Relationship of Inflation Rate on Market Capitalization to GDP (Market Cap
GDP)
Inflation is a critical macroeconomic variable that influences both investor behavior
and the valuation of financial assets (Siswanah, 2021). In the context of ASEAN
economies, the inflation rate affects the real returns of investments, thereby influencing
investor sentiment and decisions (Adiputra & Affandi, 2018). Moderate and stable inflation
is typically associated with a healthy investment climate, as it ensures predictability in
financial markets and supports corporate profitability. However, excessive inflation may
erode the real value of equities and deter long-term investment, which in turn affects
overall market capitalization (Al-Rimawi & Kaddumi, 2021).
In emerging markets such as those in the ASEAN region, the inflation-market
capitalization relationship is particularly nuanced (Farooq & Ahmed, 2017). For example, a
study on ASEAN-5 countries found that an inflation rate above 7.84% serves as a critical
threshold, beyond which inflation begins to impede economic growth and destabilize
capital markets . This phenomenon occurs because high inflation distorts price signals,
increases uncertainty, and leads to higher interest rates, which can depress stock valuations
and reduce market depth. Moreover, managing inflation effectively contributes to financial
and social stability, aligning with Sustainable Development Goal (SDG) 10: Reduced
Inequalities. Keeping inflation within an acceptable range protects the purchasing power of
lower-income groups and safeguards the real value of small-scale investments, thus
reducing economic disparity and supporting inclusive financial markets. A controlled
inflation environment is conducive to a higher Market Cap GDP ratio, as it supports both
investor confidence and long-term capital formation.
H3: There is a non-linear relationship between inflation rate and the market capitalization-
to-GDP ratio, where moderate inflation positively influences market depth, but high
inflation
The Relationship of IPO Count on Market Capitalization to GDP (Market Cap GDP)
The frequency of Initial Public Offerings (IPOs) serves as a vital indicator of a
country's capital market dynamism and depth (Garbowski et al., 2019; Shukla & Shaw,
2023). The surge in IPO activity aligns with the objectives of Sustainable Development

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Goal (SDG) 9, which emphasizes Industry, Innovation, and Infrastructure (Garbowski et

al., 2019; Shukla & Shaw, 2023). By facilitating access to capital for businesses, IPOs play
a pivotal role in fostering innovation, promoting sustainable industrialization, and
enhancing infrastructure development. Moreover, the expansion of the investor base,
evidenced by the 21.77% increase in Single Investor Identifications (SIDs) to 14.8 million
as of December 2024, underscores the growing public participation in capital markets A
thriving IPO landscape not only augments the Market Cap GDP ratio but also signifies a
healthy and inclusive capital market ecosystem, conducive to economic growth and aligned
with broader sustainable development objectives.
This study focuses on analyzing the drivers of capital market deepening in six
ASEAN countries Indonesia, Malaysia, Singapore, Thailand, the Philippines, and Vietnam
—over the period 2010 to 2024. The target population consists of country-level annual
macroeconomic and capital market data, forming a balanced panel with 84 observations
(Asmarani & Ningsih, 2023). The research context centers on the financial-economic
linkages supporting sustainable development goals (SDGs), particularly SDG 8, 9, 10, and
17 (Mail et al., 2020; Ballester, 2025). The unit of analysis is the country-year, reflecting
how macroeconomic factors influence capital market depth annually in each country.
H4: There is a positive and significant relationship between the number of Initial Public
Offerings (IPOs) and the market capitalization-to-GDP ratio in ASEAN countries.

3. Research Methods
The data collection involved secondary data obtained from reputable sources such as
the World Bank, ASEAN Exchanges, IMF, and national stock exchanges. The main
variables include stock market returns, GDP growth rate, inflation rate, IPO counts, and
market capitalization to GDP ratio. These data were extracted, cross-checked for
consistency, and compiled into a panel dataset ready for econometric analysis. The
measurement of variables is as follows:
1) Market Cap GDP serves as the dependent variable, defined as the ratio of total stock
market capitalization to GDP, reflecting capital market depth.
2) Stock Market Return represents the annual return on the main stock index in each
country.
3) GDP Growth Rate measures the yearly percentage change in gross domestic
product.
4) Inflation Rate captures annual changes in consumer prices.
5) IPO Count records the number of initial public offerings each year. For
normalization and variance stabilization, IPO Count was logarithmically
transformed in the regression model.
To examine the data, this study employs the System Generalized Method of Moments
(System GMM), a dynamic panel estimation technique well-suited to addressing key
econometric challenges such as endogeneity, unobserved heterogeneity, and

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autocorrelation. Unlike traditional estimators, System GMM leverages lagged values of the
dependent variable as internal instruments, thereby reducing bias arising from omitted
variables and simultaneity. Moreover, the use of a robust two-step estimation procedure
enhances the efficiency of coefficient estimates by correcting for potential
heteroskedasticity and serial correlation in the error terms. This methodological approach
ensures a more reliable and consistent assessment of how macroeconomic factors influence
capital market deepening across ASEAN economies. The empirical model is formally
specified as follows:

Y ¿ =α + β1 Y i ,t −1+ β2 X 1 ,¿+ β 3 X 2,¿+ β X 3,¿+ β ¿ ¿

4 X ¿
5 4 ,¿+ ε¿ ¿

Where:
Code Variable Description
Y¿ : Market Capitalization to GDP Ratio (Market Cap GDP)
Y i ,t −1 : Lag of Market Cap GDP (Dynamic term)
X 1 ,¿¿ : Stock Market Return
X 2 ,¿¿ : GDP Growth Rate
X 3 ,¿¿ : Inflation Rate
X 4 ,¿ ¿ : IPO Count (Log-transformed)
ε¿ : Error term (includes unobserved heterogeneity after differencing)

To ensure the robustness and validity of the dynamic panel model, this study utilizes
the System Generalized Method of Moments (System GMM) estimator, a technique
specifically designed to handle the complexities of panel data, including potential
endogeneity, unobserved heterogeneity, and dynamic interactions among variables. By
incorporating lagged dependent variables as instruments, the model effectively reduces
biases that may arise from omitted variables and reverse causality. For greater reliability,
the estimation employs the Windmeijer-corrected two-step procedure, which generates
robust standard errors that remain consistent even in the presence of heteroskedasticity and
serial correlation. This correction enhances the precision of coefficient estimates, especially
in studies with relatively small samples. Consistent with recent empirical literature, the
application of robust standard errors in GMM estimations is crucial to preventing
misleading inferences and ensuring the credibility of results (Kripfganz, 2019).

3. Results
The descriptive statistics table is crucial as it provides an initial overview of the
distribution, variability, and scale of each key variable used in the study. It highlights substantial
heterogeneity across countries and time, particularly in stock market returns and market
capitalization relative to GDP, indicating the presence of economic volatility and structural
differences in ASEAN capital markets. These variations justify the use of robust dynamic panel
techniques such as System GMM, while also validating the appropriateness and readiness of the
dataset for further econometric analysis.

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Table 1. Summary Statistics of Financial and Macroeconomic Variables

Variable Obs Min Max Mean Std. dev
Stock Market Return 90 -32,78 48 5,08 14,99
GDP Growth Rate 90 -10 15 4,53 3,27
inflation rate 90 -1 18,58 3,11 2,6
ipo count 90 1 59 21,36 13,66
Market Cap GDP 90 15 269,9 97,6 58,29
Source: Data Analysis

The descriptive statistics reveal notable variation across all key variables in the dataset.
Stock market returns range widely from 32.78% to 48%, with a high standard deviation (14.99),
indicating significant volatility in ASEAN equity markets. GDP growth also shows a broad range
(10% to 15%), reflecting diverse economic conditions among member countries. Inflation rates vary
from 1% to 18.58%, suggesting episodes of both deflation and high inflation. The number of IPOs
spans from 1 to 59, highlighting disparities in capital market activity, while Market Capitalization to
GDP ranges from 15% to 269.9%, underscoring structural differences in financial market depth.
Overall, the data demonstrate the heterogeneity and dynamic nature of ASEAN economies,
reinforcing the need for robust econometric modeling.
To ensure the robustness and credibility of the System GMM estimation, it is essential to
conduct a series of diagnostic tests that assess the validity of instruments, the presence of
autocorrelation, and the reliability of coefficient estimates in the context of a small panel dataset.
The following table summarizes these diagnostic checks, which are critical for verifying that the
model meets the core assumptions of dynamic panel estimation. These tests help prevent biased
inference and confirm that the model appropriately captures the structural relationships among
variables across ASEAN countries.
Table 2. System GMM Diagnostic Tests and Model Validity
Test Type Test Statistic p-value Model Validity Interpretation

Arellano-Bond Test z = 1.52 0.129 No first-order serial correlation

AR(1) (valid)
Arellano-Bond Test z = 1.81 0.070 No second order serial correlation
AR(2) (acceptable)
Sargan Test χ²(1) = 0.00 0.985 Instruments are valid (not
overidentified)
Hansen Test χ²(1) = 0.00 1.000 Instruments are valid and not
correlated with error
Difference-in-Hansen χ²(1) = 0.00 1.000 Level equation instruments are valid
(subset)
Number of Instruments 7 — Below critical threshold (avoids
overfitting)
Source: Data Analysis

To validate the robustness and consistency of the dynamic panel estimation, several
diagnostic tests were conducted. The Arellano-Bond test for first-order autocorrelation [AR(1)]

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yielded a z-statistic of -1.52 with a p-value of 0.129, indicating no significant first-order serial
correlation in the differenced residuals. More importantly, the Arellano-Bond test for second-order
autocorrelation [AR(2)] produced a z-statistic of -1.81 and a p-value of 0.070, which is slightly
above the conventional 5% threshold, suggesting no strong evidence of second-order serial
correlation, a key assumption for the validity of the GMM estimator. The Sargan and Hansen tests
of overidentifying restrictions confirm the overall validity of the instrument set, with p-values of
0.985 and 1.000, respectively, both indicating that the instruments are not correlated with the error
term. Additionally, the Difference-in-Hansen test also returns a p-value of 1.000, supporting the
validity of the subset of instruments used in the level equation. With only seven instruments
employed, the model avoids the problem of instrument proliferation, further enhancing the
credibility of the estimation. These results collectively support the internal consistency and
empirical reliability of the two-step System GMM estimator, even under small-sample conditions
with robust standard error adjustment.
This regression table is crucial because it captures the core empirical findings of the study,
revealing which macroeconomic variables significantly influence the Market Capitalization to GDP
ratio in ASEAN countries. The high significance of the lagged Market Cap GDP coefficient
confirms strong path dependence in market development, while the significance of Stock Market
Return and Inflation Rate highlights their role as key economic drivers. Conversely, the
insignificance of GDP Growth and IPO activity invites further reflection on structural or
institutional factors beyond short-term macro trends. Overall, this table provides the analytical
foundation for interpreting the dynamics of stock market growth and drawing meaningful policy
implications.

Table 3. System GMM Estimation Results and Hypothesis Decisions

Variable Coefficient Std. Error t- p-Value Decision
Statistic
[Link] Cap GDP 1.130.054 0.029290 38.58 0.000 Significant

StockMarketReturn 0.980217 0.225003 4.36 0.007 Accepted

GDPGrowthRate -1.430.383 0.859007 -1.67 0.157 Rejected

InflationRate 2.202.419 0.778951 2.83 0.037 Accepted

lnIPOcount 3.795.518 5.137.831 0.74 0.493 Rejected
Constant -29.618.430 19.164.990 -1.55 0.183
Source: Data Analysis

Based on the System GMM estimation results, the lagged dependent variable [Link] Cap
GDP shows a highly significant and positive coefficient (1.130054, p < 0.01), indicating strong
dynamic persistence in capital market development across ASEAN countries. The variable Stock
Market Return is also statistically significant at the 1% level, with a positive coefficient of 0.980217
(p = 0.007), confirming that better stock performance contributes meaningfully to increases in the
market capitalization-to-GDP ratio. Meanwhile, Inflation Rate presents a significant positive effect
on Market Cap GDP (coefficient = 2.202419, p = 0.037), suggesting that moderate inflation may
support asset revaluation and investment confidence. On the other hand, GDP Growth Rate is found

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to be statistically insignificant (coefficient = 1.430383, p = 0.157), implying that real-sector growth

does not directly influence capital market deepening in the observed model. Similarly, ln IPO count
(coefficient = 3.795518, p = 0.493) fails to demonstrate a significant effect, indicating that IPO
frequency alone is not a reliable determinant of market capitalization relative to GDP. These results
collectively highlight the importance of monetary and financial market dynamics over real
economic indicators in shaping capital market development in the ASEAN region.

5. Conclusion and Suggestion

This study examined the influence of monetary risk and market dynamics on capital
market deepening in ASEAN countries, with a particular focus on stock market returns,
GDP growth rate, inflation rate, and IPO activity, using the Market Capitalization to GDP
ratio (Market Cap GDP) as a proxy. The empirical results, estimated through the System
GMM approach, reveal that stock market performance and inflation are significant
predictors of capital market depth, while GDP growth and IPO frequency do not exhibit
statistically significant effects. The findings suggest that capital market development in
emerging ASEAN economies is strongly shaped by market sentiment and monetary
conditions rather than by real sector growth or capital formation events alone. This
indicates the need for structural improvements beyond macroeconomic stability, including
institutional reforms, investor education, and regulatory enhancements, especially in
relation to Sustainable Development Goals (SDGs) such as SDG 8, SDG 9, and SDG 10.
Nonetheless, this study is subject to several limitations. First, the model does not
incorporate institutional variables such as financial regulation quality, rule of law, or
governance transparency which may influence capital market outcomes. Second, the panel
data used only covers the period from 2010 to 2024, potentially limiting the study’s ability
to detect longer-term effects and delayed structural changes. Third, despite the application
of the System GMM technique to address endogeneity, the issue of instrument proliferation
and potential measurement errors in secondary macroeconomic data remain areas of
concern. These limitations imply that while the results are statistically robust, they should
be interpreted with caution, particularly regarding causal generalization across all ASEAN
economies.
Given these considerations, future researchers are encouraged to explore the role of
institutional quality and investor behavior in mediating capital market development.
Incorporating qualitative case studies, high-frequency financial data, and behavioral
economic frameworks may provide a more granular understanding of how capital markets
evolve under different regulatory and macroeconomic settings. Moreover, future studies
might consider integrating sustainability-oriented financial indicators, such as green bond
issuance and ESG disclosures, to better capture the intersection between capital market
deepening and sustainable development. While the study provides valuable empirical
insights into the drivers of capital market development in ASEAN, it also calls attention to
the multifaceted and institutionally contingent nature of financial deepening. Strengthening

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capital markets in this region requires not only favorable macroeconomic conditions, but
also deliberate policy design, financial education, and inclusive innovation.

Discussion
The Influence of Stock Market Returns on Market Capitalization-to-GDP Ratio
A growing body of empirical research demonstrates a strong positive linkage
between stock market returns and the Market Capitalization-to-GDP ratio, implying that
improved equity performance contributes significantly to the expansion of market depth
within ASEAN economies. This outcome is consistent with the financial accelerator
hypothesis, which posits that escalating stock valuations enhance corporate balance sheet
strength, alleviate credit frictions, and ultimately encourage higher levels of investment.
Furthermore, emerging literature has revealed the existence of a bidirectional causal
relationship between stock market dynamics and economic growth across several ASEAN
member states, reinforcing the critical role that equity markets play in fostering
macroeconomic development. This interconnectedness directly supports the objectives of
Sustainable Development Goal 8 (Decent Work and Economic Growth) by enabling more
inclusive, resilient, and long-term economic advancement through efficient capital
mobilization (Fong et al., 2020; Asmarani & Ningsih, 2023).

The Influence of GDP Growth Rate on Market Capitalization to GDP Ratio

Contrary to conventional expectations, the results of the current analysis
demonstrate that the GDP growth rate does not exert a statistically significant effect on the
Market Capitalization–to–GDP ratio. While economic theory typically suggests that
sustained economic growth should enhance corporate earnings, strengthen investor
confidence, and consequently drive market capitalization, the findings suggest a more
complex reality. The influence of GDP growth appears to be mediated by critical
intervening factors, particularly the quality of institutional frameworks and the level of
financial literacy among market participants. This outcome is consistent with emerging
evidence in the literature, which highlights that macroeconomic expansion, on its own, is
insufficient to guarantee the deepening of capital markets. Without the support of robust
financial infrastructure, effective regulatory oversight, and transparent governance
mechanisms, the potential benefits of economic growth may fail to translate into stronger
capital market performance (Jahan et al., 2019; Puschmann et al., 2020). These insights
underscore the importance of strengthening financial institutions and fostering good
governance practices to ensure that economic gains are effectively channeled into capital
market development. Building a resilient and inclusive financial ecosystem not only
enhances investor trust but also drives sustainable market growth. Such reforms are closely
aligned with Sustainable Development Goals (SDGs) 8 and 9, which emphasize the
creation of resilient infrastructure, innovation-driven economies, and inclusive financial
systems capable of supporting long-term prosperity.

The Influence of Inflation Rate on Market Capitalization to GDP Ratio

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The findings indicate a positive and statistically significant link between the
inflation rate and the Market CaptoGDP ratio. At first glance, this result might seem
counterintuitive, as inflation is often perceived as detrimental to economic stability.
However, this relationship can be interpreted through the lens of moderate inflation
dynamics, where a controlled rise in prices is often accompanied by monetary expansion,
asset price revaluation, and increased liquidity in financial markets. These factors can
collectively boost market capitalization (Nguyen, 2021). Nonetheless, it is important to
recognize that this relationship is not linear. Threshold effects play a critical role: when
inflation surpasses certain levels, its impact on economic growth and financial market
performance tends to reverse. Empirical evidence suggests that high inflation erodes
investor confidence, distorts price signals, and weakens the foundations of financial
development. Thus, while moderate inflation may stimulate market deepening, excessive
inflation undermines financial stability and growth prospects. In this context, maintaining
price stability emerges as a key policy objective. Stable prices not only safeguard investor
confidence but also support sustainable economic growth. Furthermore, a well-regulated
inflation environment contributes to achieving Sustainable Development Goal (SDG) 10
Reduced Inequalities, as it fosters equitable access to financial markets and promotes
inclusive economic participation (Ehigiamusoe et al., 2019; Bouis et al., 2025).

The Influence of IPO Count on Market Capitalization to GDP Ratio

Interestingly, the analysis reveals that the number of Initial Public Offerings (IPOs)
does not exhibit a statistically significant effect on the Market Cap–to–GDP ratio. This
finding implies that IPO activity, in isolation, is not a sufficient indicator of structural
market deepening. Instead, the impact of IPOs on overall market development appears to
depend heavily on factors such as the sustained performance of newly listed firms, the
depth of market liquidity, and the capacity of investors to absorb and support these listings
over time. Recent reports highlight that, although Southeast Asia has experienced an uptick
in IPO activity in recent years, the aggregate market capitalization generated from these
listings has been on a declining trend. This pattern underscores persistent challenges in
converting IPO volumes into meaningful and long-lasting market expansion (Al-Masawa et
al., 2019; Susilo, 2022). It suggests that a surge in IPO numbers alone may create only a
superficial impression of progress without translating into tangible economic gains.
Consequently, there is a clear need for comprehensive policy interventions that move
beyond simply encouraging more IPOs. Efforts should focus on improving the quality,
resilience, and governance of listed companies, as well as enhancing market infrastructure
to support post-listing growth. By fostering an environment where IPOs contribute to
sustainable value creation rather than short-term spikes, policymakers can ensure that
capital markets evolve in a way that supports long-term economic development. These
initiatives align closely with Sustainable Development Goal (SDG) 9 – Industry,
Innovation, and Infrastructure, as they promote innovation, strengthen financial
ecosystems, and build resilient market structures capable of driving inclusive growth.

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Limitations
Like any empirical investigation, this study is subject to several limitations that
warrant consideration. First, the reliance on macro-level panel data may obscure significant
heterogeneities at the firm and sectoral levels. Such granular differences—ranging from
industry-specific dynamics to variations in corporate governance—could provide deeper
insights into the mechanisms that drive capital market development but remain undetected
in an aggregated dataset. Second, although the analysis captures key macroeconomic and
market variables, it does not explicitly incorporate institutional factors such as the strength
of investor protection laws, the quality of regulatory frameworks, or levels of financial
literacy. These elements are widely acknowledged as crucial mediators in shaping how
macroeconomic conditions translate into capital market outcomes. Their omission may
limit the explanatory power of the model, particularly in the context of ASEAN countries
where institutional quality varies considerably. Third, the study’s time horizon (2010–
2024), while sufficient for capturing short- to medium-term trends, may fall short in fully
reflecting long-term structural transformations, especially in fast-evolving economies like
Vietnam and the Philippines. Structural reforms, regulatory shifts, and the gradual
maturation of financial systems often unfold over decades, meaning some effects may not
be fully captured within the observed period. Finally, while the use of System GMM
estimation effectively mitigates issues of endogeneity and autocorrelation, the model
remains susceptible to certain econometric challenges. Instrument proliferation can dilute
the power of the Hansen test and compromise the validity of results, while the possibility of
omitted variable bias cannot be entirely ruled out. These methodological constraints,
although addressed to the extent possible, suggest that the findings should be interpreted
with caution and regarded as a foundation for further inquiry rather than definitive
conclusions.

Implications and Future Directions

Although this study has certain limitations, the results offer valuable and practical
implications for policymakers and development oriented financial institutions. Rather than
relying solely on short term, cyclical interventions, capital market strategies in the ASEAN
region must begin to confront deeper, systemic challenges. These include improving the
credibility and transparency of institutions, fostering stronger investor participation, and
harmonizing regulatory frameworks across member states to support a more integrated and
resilient financial environment.
Looking ahead, future research can build upon these findings by utilizing more
granular datasets such as firm-level or sector-specific data and incorporating institutional
quality metrics or cross-border capital flow analysis to capture the complexities of financial
integration in the region. Additionally, blending robust quantitative techniques like
econometric modeling with qualitative approaches, including case studies and policy
analysis, may offer richer insights into how capital markets evolve under varying economic
and governance conditions. Such a mixed-methods approach would enhance the depth,

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contextual relevance, and policy applicability of capital market research in developing

economies.

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