Stock Market Growth: An Analysis of Cointegration and Causality

This paper examines the relationship between stock market growth and economic growth, privatization; stock returns in 12 emerging economies from 1988 to 2000. Using monthly data, both the Johansen Cointegration and Granger Causality tests are employed. Results from cointegration tests suggest a long run relationship between stock market liquidity and size and real activity, privatization, and stock returns in five countries, India, Korea, Malaysia, the Philippines and Zimbabwe. The results of Granger causality tests indicate that there is a bi-directional relationship between stock market growth indicators and real economic activity, privatization, and stock returns for most of these countries. These results seem to validate the co-existence of both the supply-leading and demand-following hypotheses in the intermediate stages of the economic development i.e., the existence of a bi-directional relationship between finance (stock markets) and economic growth.