Stock market development and economic growth in Sri Lanka

Abstract

This paper investigates the relationship between stock market development and economic growth in Sri Lanka using quarterly data from 1996 to 2011. The stationary of the data are tested using Augmented Dickey Fuller (ADF) test. It was found that all variables are stationary on first differencing. The relationships between economic growth and indicators of stock market development were investigated using Johansen co-integration tests, and vector error correction model (VECM). Co-integration results indicate the existence of long-run association between stock market development and economic growth in Sri Lanka. VECM results show unidirectional causality from stock market development to economic growth despite different variables used to measure the stock market development. The findings support the theoretical prediction that development of stock market would play a key role in economic growth. The study therefore concludes that stock market development leads the economic growth in Sri Lanka and efforts should be devoted to develop the stock market.