Stock market development and economic growth : a case for Zambia

ENGLISH ABSTRACT: This present study investigates the directional link between stock market development and economic growth in Zambia for the period 2002-2009, using quarterly data. While there is numerous empirical research conducted on this topic, none of it constitutes an in-depth study of the causal relationship of stock market development and economic growth in Zambia. The investigation of the causal relationship is conducted by using two methods: the recent and better Toda and Yamamoto Causality Test, and the older and popular Granger causality test. As highlighted by recent studies, the results of the Toda and Yamamoto Causality Test approach are more reliable than those of the Granger Causality Test approach, and are therefore preferred for this study. The Granger Causality Test is employed in the study for comparison purposes with the new Toda and Yamamoto approach, as well as comparison with the only study done on Zambia on the topic. Results of the Toda and Yamamoto approach support the demand following hypothesis that economic growth causes stock market development. The Granger Causality Test results lend support to the Independent view that stock market development and economic growth are independent of each other. The Granger Causality Test results support the prior study done on Zambia using the same technique but based on panel data instead of time series data as is the case for the present study. However, as the Granger Causality Test approach inherently has a number of problems, its results are unreliable. Based on the result of the Toda Yamamoto approach, the study argues that the Zambian stock exchange could help promote further economic growth in the country and should therefore be integrated in the whole economic system.