The Dynamics of the Relationship between Stock Market Development and Economic Growth in Zambia

Abstract

Stock market activities assume a crucial role in determining the level of economic activities in both developing and developed economies, by effectively facilitating capital for investment, providing a proper stage to incite best corporate practices that will bring about growing investment and hence leading to a rise in the growth rate of the economy. In this regard, this study sought to empirically examine the dynamic relationship between stock market development and economic growth in Zambia. Using vector autoregressive (VAR) model and Granger causality test on quarterly time series data spanning 1996Q1-2015Q4, the study discovered that there existed a unidirectional causality running from market capitalisation to economic growth. By including certain macroeconomic variables as control variables, it was rather found that fluctuations in economic growth have significant predictive impacts on the current market capitalisation. The study further found that with the exception of inflation, changes in the level of money supply and foreign direct investment have no impacts on economic growth in Zambia.