Relationship between Stock Market and Economic Growth in Malaysia

Tan, Ye Hang (2022) Relationship between Stock Market and Economic Growth in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

The relationship of stock exchanges and economic growth is a hot topic of discussion. According to one line of research, stock market development is a significant and beneficial driver to growth. Other research, on the other hand, demonstrate that stock markets have a negative impact on growth or are irrelevant contributors to economic progress. Therefore, this research aims to examine the impact of stock market on economic growth in Malaysia by using quarterly time series data ranging from 1996 to 2019. Not only that, this research also examines the relationship between stock market and the gross domestic product of Malaysia. Specifically, the objectives of this research are to determine the long run relationship and short run causality between stock market and economic growth of Malaysia. In this research, all the variables are first assessed with Unit Root Test and are proceeded with Johansen Juselius cointegration test to determine whether the variables are cointegrated with one and another. Then, the Vector Error Correction Model (VECM) is applied to identify the long run relationship among the variables and followed by the Granger Causality test to find out short run causality between the variables. Based on the results, it is revealed that there is a long run equilibrium relationship between market capitalization, stock turnover ratio and economic growth in Malaysia. The Granger Causality test showed that stock market has a bilateral causal relationship with the GDP. The findings from the study recommended the policy makers should intervene into stock market to enhance the economic growth in Malaysia.