Title: Stock market development and economic growth in Sri Lanka

Authors: Athambawa Jahfer; Tohru Inoue

Addresses: Department of Accountancy and Finance, Faculty of Management and Commerce, South Eastern University of Sri Lanka, University Park, Oluvil #32360, Sri Lanka ' Graduate School of International Social Sciences, Yokohama National University, 79-4 Tokiwadai, Hodogaya-ku, Yokohama city, Japan

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.

Keywords: stock markets; economic growth; Sri Lanka; stock market development; Johansen co-integration; vector error correction model; VECM.

DOI: 10.1504/IJBEM.2014.063888

International Journal of Business and Emerging Markets, 2014 Vol.6 No.3, pp.271 - 282

Received: 28 Nov 2013
Accepted: 30 Jan 2014
Published online: 28 Aug 2014 *

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