Abstract:
This paper investigates the relationship between stock market
development and economic growth in Sri Lanka using quarterly data from 1996
to 2011. The stationary of the data are tested using Augmented Dickey Fuller
(ADF) test. It was found that all variables are stationary on first differencing.
The relationships between economic growth and indicators of stock market
development were investigated using Johansen co-integration tests, and vector
error correction model (VECM). Co-integration results indicate the existence of
long-run association between stock market development and economic growth
in Sri Lanka. VECM results show unidirectional causality from stock market
development to economic growth despite different variables used to measure
the stock market development. The findings support the theoretical prediction
that development of stock market would play a key role in economic growth.
The study therefore concludes that stock market development leads the
economic growth in Sri Lanka and efforts should be devoted to develop the
stock market.
