Abstract
The relationship between stock market development and economic growth varies across nations and regions. This relationship is of significance to regulatory authorities, investors and portfolio managers in their operations aimed at enhancing the welfare of the citizens and clients at large. The purpose of this study is to examine the relationship between these two variables in Zimbabwe for the period 1989 to 2014. The paper employed the Vector Error Correction Model approach after establishing the order of integration (unit root tests) and cointegration between variables. All the variables were found to be stationary at 1% level after first differencing using the Phillips-Peron tests. The long run relationship was negative, whereas the short run coefficients were insignificant. Though contrary to financial theory, the results, to a large extent, testify to what happened during the period. Based on these findings, the Zimbabwe Stock Exchange and Securities and Exchanges Commission are urged to come up with alternative products to lure new listings from the small to medium enterprises. It is also recommended that all the stakeholders focus beyond the Zimbabwe Stock Exchange to promote economic growth as the firms seem to raise funds from other sources.
Highlights
The connection and co-movement between stock market development and economic growth have been heavily debated by financial economists as evidenced by the large number of published articles on the matter
The purpose of this paper is to examine the connection between the domestic stock market developments and economic growth
E-views 7 automatically analyse the variables in their first differenced form in the case of Vector Error Correction Model (VECM), the variables were not transformed as this was done automatically in the system
Summary
The connection and co-movement between stock market development and economic growth have been heavily debated by financial economists as evidenced by the large number of published articles on the matter. What remains thorny to researchers is the question as to why such a relationship exists. Is it pure coincidence, wealth effect, or is the stock market a ‘mirror’ or a leading indicator of the economy or does the stock market drive the economy or the reverse? The purpose of this paper is to examine the connection between the domestic stock market developments and economic growth. Though the local stock market has gone through a phase of phenomenal developments, it is not clear if such developments promoted or ‘mirrored’ or predicted economic growth or else such improvements were independent of the economy
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