Abstract
According to the literature, the development of a stock market is critical to the growth of the economy. However, a different perspective has been presented on the role of stock market development on economic growth, particularly in developing economies. Some scholars believe that stock market developments benefit the economy in diverse ways. In contrast, others question whether stock market developments play a fundamental role in economic growth, particularly in developing economies.
Due to a lack of common consensus on this subject and minimal attention from a South African perspective, the researcher aims to do a study that will bridge the gap and investigate the nature and causal relationship between stock market development and economic growth in South Africa. The study employed annual time-series data from 1980 to 2020. The stock market development is presented through four variables: Stock Market Capitalisation Ratio, Stock Market Turnover Ratio, Total Value Traded and The Number of Listed Domestic Companies. Gross Domestic Product is used as a proxy for economic growth.
The control variables include Inflation and Foreign Direct Investment. A Vector Error Correction Model and the Granger-Causality method are the econometric techniques used in this study. Four perspectives are used to describe the causal relationships between stock market development and economic growth: the Supply Hypothesis, the Demand Hypothesis, the Bi-directional Hypothesis, and the Independent Hypothesis.
The study's outcome indicates that the Stock Market Turnover Ratio, which is a measure of stock market liquidity has a causal relationship with Economic Growth in the short run, favouring the Supply Hypothesis. A Bi-directional relationship was discovered between the Number of Domestic Listed Companies and Economic Growth in the short run. However, in the long run the study discovered that the Stock Market Turnover Ratio has a negative impact on Economic Growth, whereas the Number of Listed Companies has a positive impact on economic growth.
The outcome of the study points to recommendations that policy efforts should be geared toward increasing participation in the stock market. This can be achieved by offering tax incentives for firms that intend to list for the first time on the JSE and restore investors’ confidence in the stock market operations. However, the finding of the study also warns against excessive liquidity in an unstable macroeconomic environment with a high inflation rate, which can hinder economic growth.
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Keywords
Keywords: stock market development, economic growth, stock market, market capitalisation ratio, turnover ratio, total value traded and the number of listed domestic companies.