The Relationship Between Stock Market Liquidity and Economic Growth in Kenya

Abstract

A stock market is a creation of the financial ecosystem, with the primary aim of driving efficient capital formation and allocation. The stock market also acts as an enabler to both the public and private sectors to finance new initiatives as well as drive growth and innovation through raising of long-term capital. The paper examined the relationship between stock market liquidity and economic growth in Kenya. Researcher employed the ordinary least squares regression (OLS) using quarterly time series data running from 2010 to 2014, together with Augmented Dickey Fuller (ADF) for testing stationary as well as Bounds Testing for cointegration for existence of long run relationships between variables. Using Wald test for bound testing, it was found out that the variables in the model were co-integrated, meaning presence of a long run relationship between economic growth and the various variables in the model. The results from Granger Causality test established unidirectional causality running from stock market liquidity (LIQY) to gross domestic product growth rate (GDPG). The paper concludes that stock market liquidity impacts growth in Kenya in the long run and insignificantly in the short-run.