The Relationship between Stock Market Performance and Economic Growth In the East African Community

Abstract

Purpose – This paper investigated the relationship between the stock market performance and the economic growth in the East African Community. The stock market variables considered in the study were stock market capitalization, market liquidity and share price volatility. The GDP growth was a used a measure for economic growth.

Methodology – The quantitative research methods were employed to define the nature of relationship between the variables. The population of the study was the All-Share index in the 4 stock markets in the member countries. To fulfill the purposes under the research, the stock market performance of the EAC member countries was collected from the Capital markets, EASRA and the respective Stock Exchanges. Data for GDP growth was collected from the World Bank website. The study employed the Vector Autoregressive (VAR) model as well as the Granger test for causality to estimate as well as provide evidence regarding the nature and direction of relationship of the variables.

Findings - The study established an existence of long term relationship between the stock market performance variables (market capitalization and liquidity) and economic growth in the East African community. The study established that there was no relationship between the share price volatility of the stock market and economic growth.

Implications - These results depict that an increase in stock market capitalization and liquidity in the East African Community contributes to the economic growth in the long term. Policies, measures and efforts geared towards improving the efficiency of the stock markets through lowering transactional costs and improving equity turnover should be put in place by the East Africa Community to enhance economic development and growth of the region.

Value – The study established the need for the East Africa Community to focus on developing strong and effective stock markets as well as policies to foster investments and economic growth in the region. Through the establishment of the East African Securities Regulatory Authority (EASRA), policies that encourage financial integration and deepening as well as listings and cross listings ought to be established to spur economic growth.