Emerging Stock Market Performance and Economic Growth

Problem statement: In spite of significant development in Iran stock market as a emerging stock market, there has been not specific research on the causality between the stock prices and economic growth. This study represented a systematic investigation of the relationship between stock market performance and economic growth in Iran by conducting causality tests within the Vector Error Correction Model (VECM) framework. Approach: To achieve this objective unit root tests are fulfilled for all time series data in their levels and their first differences. Johansen co-integration analysis is used to investigate whether the variables are co-integrated of the same order taking into account the maximum eigenvalues and trace statistics tests. A vector error correction model is applied to examine the long-run relationship between stock market performance and economic growth. Finally, Granger causality test is applied in order to find the direction of causality between the examined variables of the estimated model. Results: Findings imply the causality link between economic growth and stock price fluctuations in the long run, as well as bilateral causality running between share prices and economic growth in the short run. Conclusion: Therefore, it can be inferred that the level of real economic activity is the main factor in the movement of stock prices in the long run and stock market plays a role as a leading economic indicator of future economic growth in Iran in the short run.