Investigating the financial market development and shadow economy nexus in the presence of country risk in an emerging economy

Sami Ur Rahman; Faisal Faisal; Adnan Ali; Hamid Ghazi H Sulimany; Ayman Hassan Bazhair

doi:10.1016/j.heliyon.2023.e17791

Investigating the financial market development and shadow economy nexus in the presence of country risk in an emerging economy

Heliyon. 2023 Jul 4;9(7):e17791. doi: 10.1016/j.heliyon.2023.e17791. eCollection 2023 Jul.

Authors

Sami Ur Rahman¹, Faisal Faisal^{1

2}, Adnan Ali³, Hamid Ghazi H Sulimany⁴, Ayman Hassan Bazhair⁵

Affiliations

¹ Institute of Business Studies and Leadership, Faculty of Business and Economics, Abdul Wali, Khan University, Mardan, KP Pakistan.
² World Peace University, Nicosia, Sht. Kemal Ali Omer Sk., No.22 Yenisehir, Lefkosa, TRNC, Cyprus.
³ Department of Management Sciences, Shaheed Benazir Bhutto University Sheringal Dir (U), Khyber Pakhtunkhwa, Pakistan.
⁴ Faculty of Business Administration College, Accounting Department, Taif University, Saudi Arabia.
⁵ Faculty of Business Administration College, Department of Economic and Finance, Taif University, Saudi Arabia.

Abstract

This research study examined the influence of financial market development on the shadow economy and the moderating effect of country risk (political, economic, and financial) in this nexus in Pakistan. Using data from 1995 to 2018, the study applied the Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests, followed by the F-bounds test to investigate stationarity and cointegration in the series, respectively. The study utilized the Autoregressive Distributed Lag (ARDL) approach to estimate the long-run relationship, and to examine the possible causal relationship among the variables, the study employed Breitung and Candelon's (2006) spectral test. The study identified that financial market development is negative, and the country's risk determinants are positively associated with the shadow economy's size. Moreover, the study found that country risk positively moderates the influence of financial market development on the shadow economy. The results also highlighted a unidirectional relationship from economic and financial risk towards the shadow economy. Finally, based on the empirical findings, the study recommends some policy implications to the regulators of financial markets and the shadow economy.

Keywords: Country risk; Financial market development; Moderating effect; Shadow economy.