Investigating the effect of financial openness on the development of Iran's capital market

Considering the effect of economic growth on the level of development of societies, the investigation of factors affecting it is always one of the basic and significant issues of governments and policymakers. One of the important factors for achieving economic growth is a developed capital market. Financial openness is one of the economic factors that are effective on the development of the capital market because no matter how much a country can have financial and capital relations with other countries, as well as economic exchanges from the acquisition of technology, creativity that leads to an increase in capital accumulation, diversification of the portfolio of shareholders and division The risk between the domestic and foreign markets is also shared. Financial liberalization promotes financial development by channeling funds to investors who are active in high-yield projects and by increasing the efficiency of financial institutions and domestic markets. Also, the effect of financial liberalization on the development of the capital market is that increasing the degree of financial openness leads to an increase in the level of savings, which enables a faster rate of capital accumulation and further development of the capital market. In this research, the effect of two variables, financial openness, and capital market development, on each other in Iran's economy has been investigated

Considering that in other studies, the mutual and simultaneous effects of financial openness and capital market development are not taken into account and this simultaneity causes bad effects such as bias in estimation and inconsistency of estimators, the main purpose of this study is to investigate the effect of financial openness and capital market development Iran on each other using the simultaneous equation system approach and the Three-stage least squares method from 1991 to 2021. Most studies that examine the relationship between financial openness and financial development traditionally measure a country’s financial development using quantity-based proxies for the depth of domestic financial markets, particularly the overall size of a financial sector, such as the number of domestic credits to the private sector provided by banks as a percentage of GDP, the number of domestic credits provided by the financial sector as a percentage of GDP, the market capitalization of listed domestic companies as a percentage of GDP, and the amount of broad money as a percentage of GDP. In this research, the ratio of stock market value to GDP is considered as an index of capital market development and net foreign assets to GDP, a variable of financial openness. The required information and data from the World Bank and the Central Bank of Iran have been used

The results show that financial openness has a positive effect on the development of the capital market. According to the findings, in addition to financial openness, the real interest rate also has a positive effect on capital market development, while private sector credits and government size do not show a significant effect on capital market development, and commercial openness has a negative effect on capital market development index. Also, the results confirm the positive effect of capital market development on financial openness.

A developed capital market can be considered an important factor for economic growth. One of the economic factors of capital market development is financial openness. Financial openness can be defined as the extent to which a country is open to international capital flows, which can affect domestic financial development by increasing market liquidity or by improving market efficiency. When a country opens its financial markets to allow for international capital mobility, it establishes the integration process whereby its domestic financial markets will gradually converge on the world’s financial markets. Financial openness provides domestic firms and financial institutions with access to international capital markets; hence, they can often obtain external funds at lower costs than before. The easing of restrictions on cross-border capital flows exposes a domestic financial sector to foreign competition, which should catalyze improvements in the performance of domestic financial institutions and thus promote more prudential regulation, supervision, and institutional efficiency in the country. On the other hand, better financial systems and markets can increase financial openness. Hence, theoretically, the relationship between financial openness and financial development should be bilateral. According to the main goal of the research, the results show that financial openness has a positive and significant effect on the development of the capital market. According to the findings of the research, the following suggestions are provided: By increasing the degree of financial openness, which is the result of factors such as presence on the international scene, reduction of domestic economic and political risks, transparency, and efficiency of the capital market, it is possible to help the development of the capital market.

The policymaker should pay attention to this point, as financial openness is a positive factor in financial development, at the same time, it can also be a destabilizing factor through the influence of international financial relations. Therefore, it is necessary to remove obstacles and create legal and institutional infrastructure before financial liberalization.

Considering that macroeconomic policies, including targeting economic growth, reducing government spending, and inflation, play an essential role in financial development, policymakers should consider issues affecting financial development in formulating monetary and financial policies.