The Linkages among Insurance, Banking Credit and Stock Markets in G7 Countries - Evidences from Long - and Short - run Perspectives -

This paper investigates the short-run and long-run linkages among insurance activity, banking development, and stock market for G-7 countries. To examine the short-run causal nexus, we adopt the Granger causality approach proposed by Toda and Yamamoto(1995). To explore the long-run relationships, we introduce an extended nonlinear econometric model with the Jumarie’s fractional derivative based on the fractional financial model for economic system, and the multiple stepwise regression technique is employed to explore the optimal regression. Our empirical results show that there exist various patterns of dynamic relationships among the three financial sectors. Specifically, their short-run and long-run relationships are country-specific, and the long-run linkage is stronger than the short-run linkage. Furthermore, the short-run causal relationship between insurance activity and banking credit is the strongest, whereas the long-run relationship between stock market and banking credit is the strongest. These findings offer some useful insights not only for investors to diversify their risk away, but also for policy makers to realize the synergistic development of the financial system in the process of economic growth.