Stock market development and economic growth in African frontier markets

Abstract

There are three perspectives that have been used to explain the relationship between financial development and economic growth: the finance-led growth hypothesis, the growth driven finance hypothesis and the bi-directional relationship. As such, the casual relationship between stock market development and economic growth is still the subject of debate in research. This paper aims to address this topic in the context of African frontier markets. The Granger Causality test is applied to determine the direction of causality between stock market development and economic growth in African frontier markets using annual data from 1993-2014. These markets include: South Africa, Nigeria, Kenya, Mauritius and Morocco. The regression model is estimated using a panel Vector Error Correction Model. The Im, Pesaran and Shin test is conducted to determine the stationarity of the data while the Johansen Fisher test is used to determine the presence of co-integration among the variables. Based on the findings, there exists a long-run causal relationship running from stock market development to economic growth in the African frontier markets. This implies that stock market development promotes economic growth in these countries.