An Examination of the Relationship between Stock Market and Economic Growth: A Study in Malaysia

Abstract

This study attempted to examine the co-integration relationship and causality direction between the stock market and the economic growth of Malaysia. The study used time series quarterly data over a timescale of 15 years spanning from the first quarter of 1991 to the last quarter of 2009. Share price (independent variable) data as the indicator of stock market performance was collected from the Kuala Lumpur stock exchange (KLSE), and country’s gross domestic product (GDP) as the indicator of economic growth (dependent variable) from the ‘DataStream’ database. The Engle Granger Co-integration and the Granger Causality approaches were used to find out the long, as well as short-run and causality relationship between variables respectively. The empirical results suggest that there exists a long and shortrun correlation between stock market and economic growth; however, Granger Causality test suggests a unidirectional causality relationship.