The relationship between stock market development and economic growth: a case study of Kenya

Abstract

This paper studies the causal relationship between stock market development and economic growth in Kenya for the period 2002 to 2014, using quarterly secondary data. The indicators of stock market development used are market capitalization ratio and value traded ratio whilst the indicator of economic growth selected is the real growth rate in GDP. The main objective is to undertake an empirical analysis of the data in order to determine the direction of causality between stock market development and economic growth. In order to meet the objective, the empirical investigation is conducted using the Granger causality test. Moreover, the study employs the Augmented Dickey Fuller (ADF) and the Phillips-Perron tests to determine the integrating order of the variables. The study utilizes the VAR framework to carry out the analysis. The study finds that economic growth and the value traded ratio are stationary whilst the market capitalization ratio is integrated of order one. The results of the Granger causality reveal that economic growth Granger causes stock market development when the value traded ratio is used. However, when the market capitalization ratio is used, there exists no causal relationship between the two variables .