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This study examines the structural dependency between the developments of banking sector and stock market of Bangladesh using canonical correlation analysis. The main objective is to check whether the developments of these two financial sectors independently behave in the economic activities of Bangladesh using monthly data from 2006 to 2015. The development of banking sector is measured by a set of four indicators or variables, private sector credit, total number of branches of scheduled banks, interest rate spread and non-performing loan. Similarly another set of indicators, stock market capitalization, number of listed companies, turnover ratio and stock price volatility are used to explain the development of stock market. The multivariate time series of the two set of indicators are ensured first to be the stationary one. Then the canonical correlation analysis between the two set of indicators show that private sector credit, total No. of branches of scheduled banks are the first set of variables contribute more to construct the first canonical variate of banking sector. Market capitalization and number of listed companies are the second set of variables contribute more to construct the first canonical variate of stock market development. Finally, the correlation between the first pair of canonical variates is 0.293. Since the correlation is positive but not significant, banking and stock market developments do not significantly complement each other. Thus it is concluded that the developments of the two financial systems have been independently running during the period in financing economic activities of Bangladesh from 2006 to 2015.

A Canonical Analysis on the Relationship between Banking Sector and Stock Market Development in Bangladesh