IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH: EMPIRICAL EVIDENCE

Abstract

Development of non-oil sector of Azerbaijan was always one of the main priorities of the government. Oil sector of the economy was well developed since Azerbaijan got its independence, but in order to use the oil source more effectively it was determined to diversify the funds into non-oil sector of the economy, which in the end gave huge boost to most industries of the economy and led to increase of foreign direct investment. However, another source of the foreign direct investment and investor attraction – stock markets, were not developed and organized properly up until 1998, which was mainly due to outdated procedures left from USSR, absence of principles, methodology and understanding of how stock market can play huge role in expansion of economy and attraction of foreign investment. Nowadays, Azerbaijan has all possibilities to widen the stock market, enable easy way of increasing number of small businesses, startups and open the doors for them to global economy and lead to speedy expansion of the businesses. This research analyses the possible relationship between stock market development and economic growth, in order to predict possibility of positive impact of stock market on economic growth, overall social economic welfare of the country and business environment. For the purposes of the research, statistical figures of the country`s main economic indexes were collected: gross domestic product value, foreign direct investment value, stock market liquidity and turnover values, which were then analyzed and tested on various levels of cointegration test, Granger Causality test, vector error correction model and etc. All the analysis were done on statistical software Stata 11 based on figures of 1998-2016. The outcome of the Johansen-Julius shows existence of cointegration and by that VECM test proves relationship between stock market and economic growth in long run, while Wald Test confirms correction of this growth in short term by given explanatory variables. Hence, Granger causality test is conducted further, which determines bidirectional relationship between 3 variables: foreign direct investment, GDP and LIQ (stock market liquidity level). Based on the outcome of the analysis, study concludes that expansion of stock market and increase in foreign direct investment will have chain effect which leads to economic growth and social welfare in Azerbaijan.