Examining the Impact of Financial Development on Carbon Emissions: Insights from Emerging Economies

Abstract

This study investigates the impact of financial market development on the environmental quality of emerging countries through an analysis of panel data from 21 Emerging Countries covering the period from 2001 to 2023. To accomplish this objective we constructed stock market-based and banking sector-based indices to measure the level of financial market development using principal component analysis. We then identified the cross-sectional dependence and employed unit root testing to ensure accurate estimation. By employing a panel ARDL bound test we demonstrate thatfinancial development positively impacts environmental quality in emerging countries. The findings provide new insights for researchers and policymakers who seek to develop comprehensive energy supply and economic policies to alleviate the adverse effects of pollution.