HOW DOES STOCK MARKET DEVELOPMENT INFLUENCE THE ECONOMIC GROWTH?

The stock market performance is an emerging issue in global world. The theories and empirical studies strongly refer that stock market performance is a tool to mobilize the savings and investment to promote the industrialization and economic growth. The present study is an effort to establish the empirical relationship between stock market development and economic growth in Pakistan. Three proxies namely stock market capitalization (SMC), stock traded value (STV) and stock turnover ratio (STOR) are used for stock market development, financial depth (FD) is used as the proxy of financial intermediary and the economic growth measured with GDP growth over the time period 1988-2012. The OLS and Granger Causality test are applied to assess the investigation. The results interpret that the 99 % change in economic growth is explained with the above said explanatory variables. The STV, STOR and FD are significant while SMC appears insignificant. The causality test reported that there is bidirectional causality between FD and GDP and a unidirectional causality present between GDP to STV, SMC to GDP, FD to STOR and FD to STV. The findings suggest to policy makers that there is a strong relationship between stock market development, financial intermediary and economic growth in Pakistan