A Causal Linkage Between Stock Market Development and Economic Growth in Kenya
Abstract
Kenya's stock market has been growing since its inception in 1954 and especially after the
liberalization of the financial sector in 1991. And it's among the most developed stock
markets in sub-Saharan Africa. Stock market capitalization has risen and on average, it now
stands at ksh110 billion as of 2002. Some studies have argued that the development of the
stock market causes economic growth and vice versa, thus implying a two way causal
relationship between stock market development and economic growth. However, other
studies have argued that for a low-income country (developing country) there is no causality
between stock market development and economic growth. While in developed markets
causality runs in both directions.
The study measures development of Kenya's stock market using the relevant measures of
stock market development namely stock market size, stock market liquidity and the stock
market 20 share index. It also tests granger causality between stock market development and
economic growth as proxied by GDP.
The results show that indeed the Kenyan stock market has been developing over time .The
study finds out that the development of the stock market causes economic development in
the real sector and vice versa and thereby establishing a two-way causal relationship between
stock market development and economic growth. Stock market liquidity was identified as the
variable that causes this linkage.
The results therefore depict that policies geared towards developing the stock market and
real sectors of the economy should be put in place.
Citation
Masters of Business Administration, University of Nairobi (2003)Publisher
University of Nairobi School of Business