A Study on the relationship between Financial Market Efficiency and Economic Growth
Although the relationship is complex, there is a strong correlation between Financial Market Efficiency and Economic Growth.
Financial Market Efficiency is intricately linked to Economic Growth, acting as a lubricant for the engine of a nation’s prosperity. Capital flows to the most promising companies are ensured by efficient markets. Investments are made in companies with strong growth prospects when stock prices fairly represent their potential.
This promotes enterprise growth, innovation, and eventually economic expansion. Because efficient markets build confidence in the system, they also motivate people to invest and save. This savings pool gives firms the funds they need to expand, which creates jobs and boosts output. Furthermore, assets are fairly priced by efficient markets based on actual risks and possible rewards. This promotes a sound financial ecosystem by enabling companies to raise capital at reasonable rates and giving investors the information, they need to make wise decisions.
This connection is well supported by the available data. The US and other industrialized economies with robust financial markets typically enjoy faster rates of economic growth. But there is reciprocity in the relationship. It is still up for debate to what extent efficient markets drive growth or whether economic expansion creates more efficient markets. Most likely, there is a symbiotic interaction at work, with each component supporting the other. It’s critical to recognize that certain frictions still occur in efficient markets.
Perfect efficiency may be hampered by information asymmetry, which gives certain investors an unfair advantage, or transaction expenses. Nonetheless, effective financial markets are essential for fostering an atmosphere that supports company expansion, innovation, and eventually economic growth by enabling capital allocation, savings mobilization, and risk management.
Credits
Nitin Sharma
Wealth Management Team
