Stock market development and economic growth in Uganda

Abstract

This paper seeks to examine the impact of stock market development on economic growth in Uganda from the period of 2000 - 2015 and to establish the causal linkage between the stock market and economic growth. Stock market development was measured using three variables namely, stock market capitalisation as a percentage of GDP which measured the size of the stock market while total stocks traded as a percentage of GDP and stock market turnover were used as a proxy for stock market liquidity. Gross fixed capital formation as a percentage of GDP was used as a proxy for investment, the control variable. Results showed that stock market development and economic growth were cointegrated implying existence of a long-run relationship

the VECM model was then applied for further analysis. Empirical results indicated that stock market development positively impacts GDP only in the long-run with significance streaming from variables measuring stock market liquidity. A granger causality test was used to explore the direction of causality and the results indicated no causal link between stock market development and economic growth. However, existence of an indirect transmission through investment was plausible.