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ze of the ASEAN countries stock market is measured using the typical indices of stock market capitalization to gross domestic product (GDP) ratio. Hence, high stock market capitalization to GDP ratio reflects the growth of ASEAN’s stock market and the growing use of equity financing. It is also worth that there has been a significant growth in the number of listed companies in the ASEAN Stock Exchange during the past two decades. This is shown in Table 1, where the Malaysia stock market capitalization is the largest over five ASEAN countries were US$ 4,199 billion from 1990 until 2011 with the ratio was 1.95. Then, it followed by Singapore, the second largest stock market with market capitalization were US$ 4,088 billion and the ratio was 1.84.

As indicated in Figure 1, the stock market development, which measures the depth of five ASEAN’s stock markets which moving up and down from 1990 to 2011 especially, sharply dropped in 1997 and 2008. This was attributed mainly to the financial crisis that faced by ASEAN countries and credit crisis in United Stated (U.S.) that lead to a massive fall in market capitalization in turn was a direct result of the declining use equity financing which slow down the economic development. Therefore, it is necessary to identify whether there any relationship between stock market capitalization and economic development in long-run.

1.3 Problem Statement

The relationship between stock market and economic development, especially, in ASEAN countries bring varies of the view among economists that there is either no correlation or negative relationship between stock market development and economic growth Shahbaz et al. (2008). On the other hand, other economists believe that there is positive relationship between stock market development and economic growth Levine and Zervos (1996, 1998).

Stiglitz (1985) has shown that banks perform a better role in promoting economic growth than stock markets especially when it comes to resource allocation. Singh (1997) indicates that stock markets do not lead to long-run economic growth due to macroeconomic instability, volatility and arbitrariness of pricing process. Japillo and Pagano (1994) and Atje and Jovanovich (1993) have indicated that stock markets contribute positively in economic growth. However, Boyd and Prescott (1986), Boyd and Smith (1998), Claessens et al. (2002) and Blackburn et al. (2005) have all shown that both stock market and banks are necessary in promoting economic growth. Therefore, they consider stock markets as compliment to banks rather than substitutes.

The issue of interest here is, is there any link between stock market and economic development? In the light of this gap, this project paper sought to examine whether the positive relationship between stock market and economic development especially in selected five ASEAN countries. In addition, in which extent they complement each other can promote economic development.

1.4 Research Objectives

This study investigates the relationship between two main components of financial development and economic development in five ASEAN countries selected namely, Indonesia, Malaysia, Singapore, the Philippines, and Thailand using annually data from 1982 to 2011. The main objective is to examine the relationship of stock market and bank on the economic development.

To examine the long-run relati