Abstract:
The stock market is a common feature of a modern economy and is expected to promote economic
growth and development of an economy. This study attempts to examine whether the stock market
promotes economic growth in Sri Lanka. The study empirically examines the causal relationship
between stock market performance and economic growth in Sri Lanka based on time series data
between the period of 1997 and 2008. Econometric methods such as co-integration analysis, error
correction mechanism and Granger causality tests are employed to investigate the relationship between
GDP growth rate and three stock market performance proxies A unidirectional causal relationship is
observed between stock market performance indicators and GDP growth of Sri Lanka. The results are
in line with supply leading and demand following hypothesis. Whilst stock market appears to be
causing economic growth, there is also limited evidence of economic activity influencing stock market
performance. Thus the empirical results show endogenous characteristics of the theme discussed.
