The Causality between Equity Market Development and Economic Growth: An Egg and Chicken Problem?

The motivation behind this study is to empirically examine the casual relationship between the equity market development and GDP growth in twenty six emerging market economies over the period of 1995 to 2012.To obtain the reliable results, different econometrical techniques were used; Correlation analysis to know the causality among the equity market development (Independent variables) and real GDP growth rate (dependent variable) and to solve the multicollinearity problem. To check the stationary properties and solve the endogeneity problem, unit root ADF - fisher chi-square test and panel Generalized Method of Moments (GMM) approach were employed. It was found that significant and positive supply leading hypothesis, uni-directional relationship between equity market development and real GDP growth. Beside the macro-economic variables FDI- foreign direct investment (inflows) and trade openness have significant positive while investment ratio, exchange rate and inflation showed negative and insignificant impact on economic growth