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Stock Market Development and Economic Growth: Evidence from Bootstrap Panel Granger Causality Test

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  • Rajesh Sharma and Samaresh Bardhan

    (Delhi Technological University, Indian Institute of Technology)

Abstract

The paper presents causality analysis between stock market development and economic growth for 25 advanced economies over the period 1975-2011. We apply bootstrap panel Granger causality method (Emirmahmutoglu and Kose, 2011) for this purpose, which incorporates heterogeneity and cross-sectional dependence in a panel framework. Using alternative measures of stock market size and liquidity, we find evidence of uni-directional causality from stock market development to growth in case of individual countries as well as with panel statistics in the presence of cross-sectional dependence which support supply leading hypothesis (stock market led growth). However, we hardly find any evidence of demand-following hypothesis or feedback hypothesis. Findings also reveal that market size is relatively more important than liquidity measures in case of advanced economies despite favourable theoretical prediction that stock market liquidity might ease investments, improve allocation of capital and enhance prospects for economic growth. Probable policy implications that emerge from experiences of advanced economies is that despite several unfavourable features of stock market development, which put certain market dominated advanced economies in disadvantageous positions compared to certain bank-based economies, emerging economies should certainly focus on stock market development as alternative potential means of financial development and hence long-term economic growth.

Suggested Citation

  • Rajesh Sharma and Samaresh Bardhan, 2018. "Stock Market Development and Economic Growth: Evidence from Bootstrap Panel Granger Causality Test," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 43(3), pages 57-84, September.
    • Handle: RePEc:jed:journl:v:43:y:2018:i:3:p:57-84
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    Citations

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    Cited by:

    1. Huy Tiet Pham & Christopher Gan & Baiding Hu, 2022. "Causality between Financial Development and Foreign Direct Investment in Asian Developing Countries," JRFM, MDPI, vol. 15(5), pages 1-26, April.
    2. Klara Zalesakova, 2022. "Stock market development as a leading indicator of future economic growth in the BRICS countries," MENDELU Working Papers in Business and Economics 2022-82, Mendel University in Brno, Faculty of Business and Economics.

    More about this item

    Keywords

    Stock Market Development; Economic growth; Panel Causality;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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