The Stock Market and its Economic Interactions: An Empirical Study of Egypt

This thesis investigates the relationship between stock market development and economic growth in Egypt. Its aim is to determine the direction of causality between stock market development and economic growth. This study also includes the analysis of stock market behaviour, in particular the respond toward major international crisis namely the Luxor terrorist attack, Iraq war, and September 11. The analysis uses selected fundamental economic variables namely, inflation, interest rate, exchange rate, money supply, budget deficit, and gross domestic product and the data is analysed using quarterly data that covered the period between 1993:l to 2008:4 which includes the above three international incidents. The existence of a long-run relationship between the stock market development and the economic growth is tested using Johansen's cointegration test, followed by the analysis of the short-run dynamic, which is based on the vector error correction model (VECM), while the determination of causality between variables is based on the Granger causality test. The result of the cointegration test shows the existence of the positive long-run relationship between the stock market development and economic growth in Egypt. It shows a positive relationship between economic growth and stock market development, while the causality is from economic growth to stock market development. Additionally, this thesis also examines the relationship between the stock market volatility and economic fundamentals using generalised autoregressive conditional heterokedasticity (GARCH) model. The result shows the existence of relationship between stock market volatility with gross domestic product, government budget deficit, and interest rate. Finally, as for the reaction of the Egyptian stock market towards the world crisis namely Luxor terrorist attack, Iraq war and September 11, the results exhibit different reaction from the Egyptian stock market before and after the crisis.