STOCK MARKET PERFORMANCE AND ECONOMIC GROWTH: THE CASE OF SRI LANKA

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.