Modelling the effect of stock market development on economic growth in Kenya.

Abstract

his study analyzed the effect of stock market development indicators namely market capitalization, total value of shares traded and NSE20 share index on economic growth in Kenya as measured by the gross domestic product for the period 2000 to 2015 on quarterly time series data. The results were reported using the Johansen cointegration test and vector error correction model (VECM) and causality which were analyzed on STATA statistical software. The general objective of the study was to analyze the effects of stock market development on economic growth in. The study found both short run and long run relationship between stock market development indicators used andeconomic. The cointegration results established that total value of shares traded and nse20 share index had a positive and significant long run relationship with economic growth, while market capitalization had a negative and significant long run relationship with economic growth. The VEC model results established that stock market development indicators had short run relationship with economic growth, and the model speed to adjustment to long term equilibrium was at 75.85%. In the long run market capitalization was negative and significant to economic growth both in the first and second lag while total value of shares traded was positive and significant to economic growth in the first lag while NSE20 share index positive and significant to economic growth in the second lag. The study recommended that capital markets regulators should formulate policies that that will ensure stability of capital markets liquidity, stock market performance as well as regulate allocation of funds to productive investments so as to ensure all pooled funds are allocated to productive investments, which would certainly lead to increased performance and efficiency of the stock markets and hence developing the stock markets which in the long run will foster economic.