Abstract
In the paper, we examine the causal relationship and the direction of causality between stock market development and economic growth in Ghana, Kenya and Nigeria. In examining the causal relationship and the direction of causality, we used the Granger Causality test procedure as developed in Granger. The study regressed five indicators of stock market namely stock market capitalization (MC), stock turnover ratio (STO), stock traded value (TVL), number of listed securities (LS), and stock market index (MI) against the real gross domestic product (GDP) which is used as a proxy for economic growth. Using the 1989 – 2009 data sets, the empirical findings of the study show that there is no causal relationship between stock market development and economic growth in Ghana and Nigeria, but revealed a bidirectional causal relationship between stock market development and economic growth in Kenya. When MC was used as a proxy for stock market development, MC and LS were found to Granger cause economic growth. Bidirectional causality was found between STO and GDP. TVL was found to have a strong negative effect on GDP. Based on the results of the study, we recommend that policy makers and regulatory bodies should formulate and implement policies that will attract investors and avail the real sector of the economy the much needed fund for production and encourage listing of companies that contribute largely to GDP in the nation stock exchange.
Highlights
The use of stock market Indicator for the prediction of future economic growth or vice versa has been a debatable issue in finance and economics
African stock market has been plagued by a plethora of bottlenecks and drawbacks institutionally, structurally, and otherwise
A skewing phenomenon has been the nature of African stock market and the economy
Summary
The use of stock market Indicator for the prediction of future economic growth or vice versa has been a debatable issue in finance and economics. It is commonly believed that large decreases in stock prices are reflective of future recession, and increasing stock prices are leading indicators of future economic growth (Mun, Siong & Thing, 2008). Stock market has been associated with economic growth through its role as sources for new private capital. According to Osamwonyi (2005:4), “a stock exchange is an arrangement for trading financial securities and where one can raise long-term capital. It seeks the efficient allocation of available capital funds to the diverse uses in the economy and through its extreme sensitive pricing mechanism, ensures that the available capital resources are allocated to firms with competitive returns”. According to Yartey & Adjasi, (2007) and Singh, (1997), the establishment of stock markets in Africa is expected to boost domestic savings and increase the quantity and quality of investment
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