18. Recent developments in capital markets

This chapter builds on previous research by reviewing recent developments in capital markets in order to enhance our understanding of the role and effectiveness of capital markets in propelling economic growth, higher productivity and employment. We find that institutional quality is a prerequisite for sustained capital markets development. Also, capital markets that are liquid are less risky and more attractive to investors. Global capital market integration and portfolio diversification call for a reduction of impediments to cross-border foreign investment flows. Although enhanced regulation on financial technology (Fintech) is important in protecting investors against financial misconduct, regulators should not stifle innovation that benefits investors. The opening of capital markets to green finance has led to more supply of capital thereby reducing financing costs. Capital market contagion follows the same pattern as that of the spread of the COVID-19 pandemic. Since capital markets are interconnected globally, volatility emanating from US inflation has a spillover impact on the rest of the capital markets leading to global financial contagion. Overall, these findings have important implications for investors particularly on portfolio management and risk management. Given the crucial role that well-functioning capital markets play in fostering economic growth, the quality of legal and institutional environment is important to ensure that investors’ rights are adequately protected. Capital market reforms are also necessary to ensure that imperfect information and uncertainty do not complicate the pricing of transitional risk.