The Causality Direction of the Stock Market–Growth Nexus: Application of GMM Dynamic Panel Data and the Panel Ganger Non-causality Tests

N.P. Ravindra Deyshappriya
Additional contact information
N.P. Ravindra Deyshappriya: N.P. Ravindra Deyshappriya is the Research Director at Lakshman Kadirgamar Institute of International Relations and Strategic Studies, Sri Lanka, emails: ravipdn@yahoo.com, ravindra@lki.lk

Margin: The Journal of Applied Economic Research, 2016, vol. 10, issue 4, 446-464

Abstract: This study is an attempt to model the linkages between stock market development and economic growth in developed and emerging markets. The causality direction between stock market development and economic growth has also been examined in order to provide solid policy implications. Mainly, the relationship and direction of causality between stock market development and economic growth were tested using dynamic panel data analysis based on the Generalised Methods of Moment (GMM) and panel Granger non-causality, respectively. Additionally, panel unit root tests were also applied to check the stationary of the selected variables to avoid misleading results. The study focuses on 20 countries, both developed and emerging markets, and data were collected over the period 1990–2014 mainly from World Bank data series. Dynamic panel data analysis confirms that there is a statistically significant relationship between stock market development and economic growth in both developed and emerging markets. Further, the study emphasises that only the finance-led growth hypothesis is valid for emerging markets while developed markets support bidirectional causality between stock market development and economic growth, reflecting the existence of both the finance-led growth hypothesis and the growth-led finance hypothesis. Hence, it is crucial to formulate appropriate policies to shift unproductively allocated funds towards stock markets to meet long-term capital requirements to encourage higher economic growth. JEL Classification: C230, C220, G100, E010

Keywords: Dynamic Panel Data Analysis; Stock Market Development; Finance-led Growth Hypothesis; Granger Non-causality Test; Economic Growth (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.sagepub.com/doi/10.1177/0973801016659726 (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:10:y:2016:i:4:p:446-464

DOI: 10.1177/0973801016659726

Access Statistics for this article

More articles in Margin: The Journal of Applied Economic Research from National Council of Applied Economic Research
Bibliographic data for series maintained by SAGE Publications ().