An Empirical Investigation of Stock Market Evolution and Economic Growth in Egypt

Abstract

This paper investigates stock market- economic growth nexus in the Egyptian economy using a Vector Error Correction Model. Various measures of stock market development such as market capitalization-GDP ratio, stock traded-GDP ratio, and turnover ratio were employed to test the long run relationship between stock market development and economic growth-with rate of change of real GDP as proxy for economic growth. Industry value added-GDP ratio was also included to achieve the objective of the study. The empirical results indicate that none of the stock market development indicators have a significant influence on economic growth. Although, market capitalization-GDP ratio and stock traded-GDP ratio have a positive relationship with economic growth, their relationship is insignificant in the long run. Moreover Industry Value Added-GDP ratio does not contribute to economic growth. However the speed of adjustment toward long run equilibrium value of 176% implies that it is adjusting speedily from short run divergence to long run equilibrium in GDP annual growth rate.  Thus, policies that will encourage new listing; strengthen the trading system; boost stock market size, and lower transaction cost among others was recommended.

Keywords: stock market development; economic growth; VECM; Egypt.