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Stock Market Growth: An analysis of cointegration and causality

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  • K A El-Wassal
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    Abstract

    This paper examines the relationship between stock market growth and economic growth, privatization; stock returns in 12 emerging economies from 1988 to 2000. Using monthly data, both the Johansen Cointegration and Granger Causality tests are employed. Results from cointegration tests suggest a long run relationship between stock market liquidity and size and real activity, privatization, and stock returns in five countries, India, Korea, Malaysia, the Philippines and Zimbabwe. The results of Granger causality tests indicate that there is a bi-directional relationship between stock market growth indicators and real economic activity, privatization, and stock returns for most of these countries. These results seem to validate the co-existence of both the supply-leading and demand-following hypotheses in the intermediate stages of the economic development i.e., the existence of a bi-directional relationship between finance (stock markets) and economic growth.

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    Bibliographic Info

    Article provided by Economic Issues in its journal Economic Issues.

    Volume (Year): 10 (2005)
    Issue (Month): 1 (March)
    Pages: 37-58

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    Handle: RePEc:eis:articl:105wassal

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    1. Rousseau, P. L. & Wachtel, P., 2000. "Equity markets and growth: Cross-country evidence on timing and outcomes, 1980-1995," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1933-1957, December.
    2. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
    3. Ahmed, S. M. & Ansari, M. I., 1998. "Financial sector development and economic growth: The South-Asian experience," Journal of Asian Economics, Elsevier, vol. 9(3), pages 503-517.
    4. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, October.
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    6. Levine, Ross & Zervos, Sara, 1996. "Stock markets, banks, and economic growth," Policy Research Working Paper Series 1690, The World Bank.
    7. Alif Darrat, 1999. "Are Financial Deepening and Economic Growth Causally Related? Another Look at the Evidence," International Economic Journal, Taylor & Francis Journals, vol. 13(3), pages 19-35.
    8. Saatcioglu, Kemal & Starks, Laura T., 1998. "The stock price-volume relationship in emerging stock markets: the case of Latin America," International Journal of Forecasting, Elsevier, vol. 14(2), pages 215-225, June.
    9. Dolado, Juan J & Jenkinson, Tim & Sosvilla-Rivero, Simon, 1990. " Cointegration and Unit Roots," Journal of Economic Surveys, Wiley Blackwell, vol. 4(3), pages 249-73.
    10. Fisher, Douglas & Thurman, Walter N., 1989. "Sweden's Financial Sophistication in the Nineteenth Century: An Appraisal," The Journal of Economic History, Cambridge University Press, vol. 49(03), pages 621-634, September.
    11. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
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    Cited by:
    1. Rudra P. PRADHAN & Mak B. ARVIN & Bele SAMADHAN & Shilpa TANEJA, 2013. "The Impact of Stock Market Development on Inflation and Economic Growth of 16 Asian Countries: A Panel VAR Approach," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 13(1), pages 203-218.

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