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On the linkage between stock market development and economic growth in emerging market economies: Dynamic panel evidence

Pramod Kumar Naik (Department of Economics, Central University of Rajasthan, Kishangarh, India)
Puja Padhi (Department of Humanities and Social Sciences, Indian Institute of Technology Bombay, Mumbai, India)

Review of Accounting and Finance

ISSN: 1475-7702

Article publication date: 9 November 2015



The purpose of this study is to empirically examine the impact of stock market development on the economic growth for a panel of 27 emerging economies using annual data over the period from 1995 to 2012.


A second-generation panel unit root test developed by Pesaran (2007) has been used to test the stationary properties of the data series. To achieve the study objectives and to mitigate the endogeneity problem that exists in the given model, the authors use a dynamic panel “system GMM” estimator. The authors also use a heterogeneous panel causality test proposed by Dumitrescu and Hurlin (2012) to examine the direction of causality among the variables.


The empirical findings indicate that stock market development significantly contributes to economic growth. Further, a unidirectional causality running from stock market development to economic growth has been found. This finding is consistent with the supply-leading hypothesis. Besides stock market development, it is also evident that macroeconomic variables, such as investment ratio, trade openness and exchange rates, have significant impact on economic growth.

Research limitations/implications

The findings suggest that a well-functioning stock market, a more globalized economy and increasing aggregate investment can potentially foster the economic growth in those emerging economies.


Unlike other studies, this study constructs three alternate composite indices along with the individual indicators of stock market development and applies robust panel econometric techniques to establish more reliable results.



Naik, P.K. and Padhi, P. (2015), "On the linkage between stock market development and economic growth in emerging market economies: Dynamic panel evidence", Review of Accounting and Finance, Vol. 14 No. 4, pp. 363-381.



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