Nascent Markets: Understanding the Success and Failure of New Stock Markets

We study the success and failure of newly established stock markets, as measured by listings, market capitalization, and trading activity. Early success is a necessary but not sufficient condition for long-term success, while small population, high corruption, limited law and order, low financial integration, and low GDP per capita are necessary but not sufficient conditions for failure. Out of many determinants identified in the literature, merely three indicators jointly predict success with high accuracy: ethnolinguistic fractionalization, democratic participation, and GDP. Our results highlight the importance of path dependence and of “structural factors” (vs. “policy factors”) in predicting nascent market success.