Stock Market Development And Economic Growth Nexus: Empirical Evidence From Kenya

Abstract

Studies reveal that stock market development is a very critical component of economic growth in both developing and developed economies across the world. This is because, these markets provide a platform for resource allocation. Various studies have been conducted on the relationship between stock market development and economic growth. However, literature remains inconclusive on the causality relationship between stock market development and economic growth. In addition, most of the studies have focused on the relationship between stock market development and economic growth and not causality link. The study had sought to answer a research question, what is the causality link between stock market development and the Kenya’s gross domestic product. The objective for this study was; to investigate this link by applying time series methods on Kenyan data collected half annually for a period of 24 years (1993-2015). To achieve this, Vector Autoregressive Model granger causality technic was employed. First, the study performed stationarity test using Augmented Dicky Fuller to make sure that all variables were stationary before running the model. In addition, co-integration test was performed to predict whether there was either short-run or long-run relationship among the variables, a test which confirm the absence of co-integration, i.e. to existent of short-term causality relationship. Both descriptive and regression results were generated. Descriptive results were presented in tables and graphs. Results established a bidirectional causality relationship between economic growth and market capitalization, economic growth and stock turnover ratio, and economic growth and the transaction volume at the Nairobi Securities Exchange. This implies that collectively, all the measures of the stock market development, have a bidirectional link with the growth in the gross domestic product. In addition, findings reveal that there is a causality relationship between stock market development and control variables (Foreign Direct Investment, and Inflation). The study recommended the need by the government and development agencies to formulate and implement policies to promote stock market development and economic growth. In addition, the study recommended for the government and other development agencies to create conducive climate for investment, and stable macroeconomic factors to enhance economic growth.