Stock market development and economic growth: war and post war evidence from Sri Lanka.

Abstract

This paper aims to investigate the relationship between stock market development and economic growth in Sri Lanka for the period of 2004 to 2014. Interestingly this period includes the extensive civil war period and post war period prevailed in Sri Lanka. For the purpose of measuring the stock market development four proxies applied in this paper namely; Market Capitalization Ratio, Change in number of Listed Companies, Total Value Traded Ratio and Turnover Ratio. The economic growth is measured by the changes in Gross Domestic Production at constant price. We use Johansen Cointegration test to explore long term relationship between stock market development and economic growth. Previous literature suggests that it is the most relevant model to examine long run equilibrium between variables. By employing Granger Causality test, we investigate causal relationship between stock market development and economic growth. All the statistical tests are carried out for both the war and post war period. The results confirmed the existence of long term equilibrium between stock market development and economic growth. Also, the results demonstrate causality between stock market development and economic growth both during the war period and post war period.