Relationship between economic growth and stock market development

The capital market plays an essential role in the growth of commerce and industry which ultimately affects the economy of the country to a large extent. This is the rationale that the industrial bodies, government advisors and even the central bank of the country keep a close eye on the activities of the stock market. This paper explores the relationship between the stock market development and economic growth in Pakistan for the period of 1986 to 2008. We investigated the stock market development and economic growth relationship by using the two major measures of stock market development, namely: size of the market and liquidity prevalent in the market in terms of market capitalization. The results revealed that economic growth can be attained by increasing the size of the stock markets of a country as well as the market capitalization in an emerging market like Pakistan.   Key words: Pakistan, stock market development, economic growth, augmented dicky-fuller test, market capitalization, liquidity, human development index, emerging economies.