The Causality between Stock Market Development and Economic Growth: Econometric Evidence from Bangladesh

Abstract

The growth performance of Bangladesh over the last one and a half decades along with the stock market development sparks the question of whether stock market development has a significant impact on economic growth of the economy. The study investigates the time series evidence of the influence of stock market development on growth of Bangladesh economy for the period 1993-2016 employing ARDL Bounds testing approach and finds stock market development has direct impact on economic growth both in the short-run as well as in the long run together with financial depth, interest rate spread and real effective exchange rate. Granger causality tests confirm a bidirectional causal relationship between stock market development and economic growth. However, the study fails to identify a system convergent to equilibrium in regard to stock market development along with other factors that has important economic implications. Persistent improvement in financial depth and fall in interest rate spread throughout the sample period with consistent performance of real effective exchange rate except some spikes in recent years raise the demand for playing the needed role by all concerned for confirming the stability of stock market and its development in order to validate the steady state of equilibrium in the long-run.

Impact of Khartoum Stock Exchange Market Performance on Economic Growth: An Autoregressive Distributed Lag ARDL Bounds Testing Model

“…They revealed that economic growth was more strongly correlated with stock market efficiency than foreign investors' net trading interest. Mamun et al (2018) employed the ARDL bounds testing approach to obtain estimations for the period 1993-2016. The study found a direct impact of the stock market on economic growth both in the short and long term along with the spread of interest rates, financial support, and real effective exchange rate.…”

“…where RGDP is economic growth, MC is market capitalization as a percentage of GDP (the value of listed shares of real GDP (Mamun et al 2018), STV is the stocks traded value as a percentage of GDP (the value of the trades of domestic shares of real GDP (Ishioro 2013)), and TR is turnover ratio of stocks traded (total value of stocks traded/market capitalization) (Bayar et al 2014).…”

“…A fully fledged stock exchange market decreases credit risk to investors by providing market-rather than bank-based financing and, thus, is able to positively influence economic growth, as a perfect securities market helps investors to escape asymmetric information. This encourages companies to make investment decisions, therefore improving the efficiency of resource allocation and thereby increasing economic growth (Mamun et al 2018).…”

Private Investment Demand Function in Bangladesh: An ARDL Approach

“…The share of public investment in the meantime is increased from 5.25% to about 8% (see table 2). The growth rate over 6 percent throughout the current decade is accompanied by investment growth in the private sector thanks to the incredible development of its stock market (Mamun et al, (2018).…”

Does Stock Market Development Affect Economic Growth? Econometric Evidence From Bangladesh

“…Indeed, a well-organized stock market stimulates financing backed by the market rather than financing backed by banks and thereby eases the vulnerability to a credit crisis considerably which is found to have a growth effect on an economy (Wang & Ajit, 2013;Seven & Yetkiner, 2016;Mamun et al, 2018). It can also be regarded as a supplement instead of a substitute for the development of the banking sector in the growth process of economies and has been supported by many studies (Beck & Levine, 2004;Ehigiamusoe and Lean, 2017;Nyasha & odhiambo, 2017).…”