Stock Market - Economic Growth Nexuses: Evidence from Asian Stock Markets

Abstract

Purpose: The main purpose of this study is to examine the relationship between stock market development and economic growth in Asian countries focusing on causality direction. Methodology: The study based top 10 stock exchanges in the Asian region and the secondary data mainly collected from World Development Indicators of the World Bank over the period of 1990-2020. Generalized Method of Moment (GMM) Dynamic Panel analysis along with panel unit root and cointegration tests were employed to accomplish the objectives of the study. Findings: The cointegration test emphasizes the existence of long-term relationship between stock market development and economic growth while the GMM dynamic panel analysis confirms the positive relationship between stock market development and economic growth of top 10 stock exchanges in the Asian Region. Moreover, reverse causality which runs from economic growth to stock market development has also been confirmed by the GMM dynamic panel analysis. Consequently, bi-directional causality between stock market development and economic growth exists in the top 10 Asian stock exchanges confirming both Finance-Led Growth Hypothesis and Growth-Led Finance Hypothesis. Hence, stock market and growth-oriented policies are recommended to be implemented to optimize the mutual benefits. Originality: One of the key significances of the study is that the study has constructed a composite index to measure stock market development rather than rely on conventional measures.