Cointegration between Stock Market and Economic Growth: Evidence From Nepal

Abstract

This paper examines the linkage between stock market development and economic growth in the context of Nepal using 33 annual observations from Mid-July 1988 to 2020 on economic and financial time series of real GDP, market capitalization and annual turnover. The study employs Engle-Granger(1987) and Johansen’s (1988) cointegration test to examine the cointegration between economic growth proxied by log of real GDP and stock market development indicators, namely stock market size and liquidity, proxied by log of market capitalization and log of annual turnover, respectively. The results of cointegration show that both stock market size and liquidity can predict economic growth in Nepal. The results of cointegration test from both Engle-Granger procedures and Johansen’s method suggests that economic growth is cointegrated with both stock market size and stock market liquidity, and hence they are interrelated with each other in the long run. The basic implication of study finding is that both stock market size and liquidity significantly predict the economic growth in Nepal over the sample period and hence there is a need for promoting secondary market trading both in terms of size and liquidity.