Macroeconomic Determinants of Stock Market Development: The Role of Inflation and Liquidity in Emerging Economies

This study investigates the macroeconomic determinants of stock market development in selected Sub- Saharan Africa (SSA) and Middle East and North Africa (MENA) countries from 2000 to 2023. Grounded in the Financial Liberalization and Market Efficiency hypotheses, the research utilizes panel regression analysis to examine how inflation, liquidity, and monetary variables influence market capitalization. The findings from the Random Effects model reveal that inflation exerts a significant negative impact on market capitalization, confirming that price instability erodes investor confidence and hinders financial deepening. Conversely, the All-Shares Index and total trading volume demonstrate a significant positive relationship, highlighting the critical role of market performance and liquidity in driving market size. Furthermore, the study finds that while money supply and educational enrolment positively stimulate market development, high interest rates act as a deterrent to investment. Regional comparisons indicate that SSA markets are driven by liquidity and human capital, whereas MENA markets are more sensitive to monetary policy adjustments. The study concludes that sustainable stock market development requires a stable macroeconomic environment characterized by controlled inflation and enhanced liquidity. It recommends policies that incentivize long-term capital formation and improve financial literacy to foster resilient emerging markets.