Causality between stock price and GDP in Turkey: An ARDL Bounds Testing Approach

The study investigates the dynamic relationship between stock prices and GDP in Turkey using quarterly data from 1989Q2-2014Q2. The study investigated the interrelationship between the variables via auto regressive distributive lag (ARDL) framework and ECM to analyse the existence of a long-run equilibrium relationship between gross domestic product and stock prices. The results provide strong evidence that both the stock prices and GDP are strongly cointegrated in the long-run. The empirical estimation indicated a significantly positive relationship between GDP and stock prices. The robustness of the ARDL model was confirmed by using Johansen and Juselius’s cointegration test (1990). The Granger causality test results indicate a long-run bidirectional causality between stock prices and GDP, and also a uni-directional causality from GDP to stock prices in the short-run. Both the stock prices and the economic growth are directly linked with each other. The reliability and validity of our estimations are confirmed by the diagnostics and the CUSUM test