Stock Market Development and Economic Growth: War and Post War Evidence from Sri Lanka

Transcription

1 Sock Marke Developmen and Economic Growh: War and Pos War Evidence from Sri Lanka Dayarane. DAI and Wijehunga. AWGCN Deparmen of Accounancy and Finance, Faculy of Managemen Sudies, Sabaragamuwa Universiy of Sri Lanka, P.O. Box 02, Belihuloya, Sri Lanka. Absrac This paper aims o invesigae he relaionship beween sock marke developmen and economic growh in Sri Lanka for he period of 2004 o Ineresingly his period includes he exensive civil war period and pos war period prevailed in Sri Lanka. For he purpose of measuring he sock marke developmen four proxies applied in his paper namely; Marke Capializaion Raio, Change in number of Lised Companies, Toal Value Traded Raio and Turnover Raio. The economic growh is measured by he changes in Gross Domesic Producion a consan price. We use Johansen Coinegraion es o explore long erm relaionship beween sock marke developmen and economic growh. Previous lieraure suggess ha i is he mos relevan model o examine long run equilibrium beween variables. By employing Granger Causaliy es, we invesigae causal relaionship beween sock marke developmen and economic growh. All he saisical ess are carried ou for boh he war and pos war period. The resuls confirmed he exisence of long erm equilibrium beween sock marke developmen and economic growh. Also, he resuls demonsrae causaliy beween sock marke developmen and economic growh boh during he war period and pos war period. Keywords: Sock Marke Developmen, Economic Growh, Johansen Coinegraion es, Granger causaliy es Background I is widely believed fac ha he capial marke is one of he key deerminans of economic growh in more advanced economies and as well as in emerging economies. However, some argue ha economic developmen maers for he sock marke developmen. This paper proceeds wih he premise ha sock marke developmen maers for he economic developmen. The fac is ha he sock marke promoes he new invesmens in he publicly raded companies by mobilizing funds from he excess unis o defici unis in he economy which subsequenly lead o increase he oal oupu of he economy in several ways. In he recen pas, here has been a significan developmen in he emerging sock markes in he world in erms of marke capializaion, large invesor base, expansion of Iniial Public Offerings (IPOs) and use of auomaed rading sysems ec. However, some counries could no susain he developmen in he sock markes due o several reasons such as civil war uprising, poliical insabiliy, economic bus ec. In case of Sri Lanka, he conflic environmen which prevailed 30 years in he counry prevened he smooh operaion of Colombo Sock Exchange (CSE) o a greaer exen. 263

2 This largely led o lose he confidence of he prospecive invesors boh local and foreign. As a resul he marke became largely shrinking and unpopular during his period. Nowadays, here has been a big improvemen in he CSE due o he peace afer ending he conflic. According o he CSE sources here is a significan improvemen such as foreign invesor base, new lising of companies is in an upward rend, liquidiy of he marke well esablished. These evidences suppor he view ha currenly, he marke has regained he confidence of he invesors and he business communiy. Furher i seems big improvemens in sock marke and economy in he recen pas. These developmens claim he need of new research base informaion for he invesors and oher sakeholders largely. The exising body of lieraure in finance has paid aenion on core areas of finance such as asse pricing, sock marke volailiy and sock marke efficiency. However, he finding of previous research evidences on his field is vague and open o furher invesigaions. Also, some emerging deerminans (such as number of lised companies, marke size, and liquidiy) of sock marke developmen are no explored or limied in he emerging marke lieraure. I suggess ha objecively deermined sock marke developmen indicaors which spur economic growh is dire in he excising body of knowledge o a greaer exen paricularly in emerging markes. To invesigaor s bes knowledge in Sri Lankan conex his is he firs aemp which looks a he relaionship beween sock marke developmen and economic growh in pos war episode and his has no been he focus of previous evidences in he global lieraure which consider war and pos war siuaion. The paper very specifically, invesigaes he long run relaionship beween sock marke developmens under wo economic scenarios such as war period, pos war period. Therefore, he finding of his paper will be useful for he policy makers of he oher emerging counries largely. The exisence of long run relaionship beween wo variables explains ha by observing he pas behavior of one variable he oher variable can be prediced. Therefore, he findings of his paper will be useful for he invesors in rebalancing heir porfolios and ulimaely maximize heir wealh maximizaion. Objecives of he Sudy The prime aim of his sudy is o explore he deerminans of sock marke developmen and secondly, o invesigae wheher he developmen of he sock marke conribues for he economic growh paricularly in an emerging marke conex. This sudy also aemps o look a he war period and pos war period modaliies beween sock marke developmen and economic growh. Hence, his sudy is designed o invesigae he following objecives. a. To explore he long erm relaionship beween sock marke developmen and economic growh. b. To invesigae he causal relaionship beween sock marke developmen indicaors and economic growh (GDP) c. To disinguish he war and pos war modaliies of sock marke developmen and economic growh. Imporanly, his sudy also aemps o shed ligh on new hinking on how he capial markes and economic growh inegrae war period and pos war period. Previous research evidences sugges ha early sudies have negleced he capial marke in heir sudies as a predominan deerminan of economic growh. Insead, i appears in he previous lieraure ha ample of sudies have focused on he relaionship beween economic growh wih he banking secor and oher financial inermediaries wihou much aenion o he sock marke developmen. 264

3 Relaed Previous Sudies There are adequae previous sudies on he relaionship beween Sock marke developmen and economic growh in developed counries and emerging counries. The firs sudy on relaionship beween financial markes and real secor aciviy was conduced by Gurley & Shaw in The sudy implied ha one of he differences beween developed and developing counries is ha he financial sysem is more developed in he former and financial markes conribue o economic developmen hrough enhancing physical capial accumulaion. Subsequenly, many scholars have focused on sock marke developmen and economic growh. For example, a posiive correlaion beween growh and indicaors of financial developmen was documened by Goldsmih (1969), McKinnon (1973) and Shaw (1973). On he oher hand, Harris (1997) argued ha here is no significan relaionship beween sock marke and economic growh over he period from 1980 o1991 covering fory nine economies. Moreover, Biswal & Kamaiah (2000) explored he empirical relaionship beween sock marke developmen indicaors and economic growh in Indian conex. They confirmed exisence of posiive relaionship beween sock marke size and economic growh. They also repored ha sock marke liquidiy has no significanly relaed wih economic growh. Conversely Caporale e al. (2004) aemped o sudy he linkage beween sock marke developmen, financial developmen and economic growh. They provided supporive evidence of seven counries which have well esablished sock markes and conended ha sock marke developmen impac on economic growh in long run. The markes covered in he sudy are Argenina, Chile, Greece, Korea, Malaysia, Philippine and Porugal. Furher, Nieuwerburgh e al. (2006) examined he relaionship beween financial marke developmen and economic growh in Belgium and suggesed ha capial marke developmen subsanially affec he economic growh in Belgium. Similarly, Shahbaz e al. (2008) repored ha exisence of srong relaionship beween sock marke developmen and economic growh which covers he period from 1971 o 2006 in Pakisan. Vazakidis and Adamopoulos (2009) explored he relaionship beween sock marke developmen and economic growh in France for he period and have documened ha economic growh has a posiive effec on he sock marke developmen. Boubakari & Jin (2010) examined causaliy relaionship beween sock marke and economic growh in five Euronex counries; Belgium, France, Porugal, Neherland and Unied Kingdom. I confirmed ha he exisence of long run relaionship beween sock marke growh and economic growh. I revealed ha posiive relaionship beween he sock marke developmen and economic growh for counries which have highly liquid and highly acive sock markes. Furhermore, Counries wih small and less liquid sock markes demonsraed absence of causal relaionship beween sock marke developmen and economic growh. Moreover, he relaionship beween sock marke developmen and economic growh in Mauriius during he period from 1989 o 2006 is invesigaed by Nowbusing and Odi (2011). Their findings suggesed ha sock marke developmen is an imporan aspec for economic growh in Mauriius in shor run and long run. Wang & Ajih (2013) found insignifican posiive impac of sock marke developmen on economic growh in china as a developing economy. They used oal marke capializaion as a proxy for sock marke developmen. I has been remarked ha sock marke developmen does no play a key role of economic growh in developing economies. Bayar e al. (2014) repored evidence of unidirecional causaliy and long run relaionship among economic growh and sock marke capializaion, oal value of socks raded and urnover raio of socks raded of 265

4 Turkish economy. Recenly, Srinivasan & Prakasam (2015) examined he direcion of causaliy beween sock marke developmen and economic growh and hey elaboraed ha he marke capializaion and urn over posiively drive on Indian economic growh. However, here is limied evidence on he causal relaionship beween sock marke developmen and economic growh in Sri Lanka. A unidirecional causal relaionship beween sock marke developmen and economic growh is in Sri Lanka repored by Ahapahhu & Jayasinghe (2012). Jahfer & Inoue (2014) explored he relaionship beween sock marke developmen and economic growh in Sri Lanka covers he period from 1996 o Their findings concluded ha sock marke developmen does posiively conribue o economic growh and sock marke developmen is he key aspec of economic developmen in Sri Lanka. In summary, mos of previous empirical sudies have suggesed a relaionship beween sock marke developmen and economic growh. Alhough he relaionship demonsraed is a causal relaionship. The lieraure review revealed ha he invesigaion of sock marke developmen and economic growh during war period and pos war period is he vacuum in he previous lieraure. The findings of hose are no conscious across counies and considerable numbers of research quesions are ye o be addressed. In emerging sock markes, hough he previous evidences limied, now here is a growing ineres among academics and praciioners in hese markes. Thus, conribuion of his paper o he exising body of knowledge is he focusing on war and pos war period in esimaing he model specificaions. Daa and Sample Period As previously menioned, his analysis uses Sock marke indicaors and economic indicaors on Sri Lankan economy from 2004 o This period assures he inclusion of boh war and pos war effec in Sri Lankan marke. In order o achieve war and pos war modaliies of sock marke developmen and economic growh, he original series was divided ino wo sub periods known as war period and pos-war period. The war period comprises of Q Q and pos war includes Q Q. The oher economic indicaors and sock marke indicaors are obained from annual repors of Cenral Bank of Sri Lanka and CSE Daa Library issued by he CSE. This sudy applied he quarerly daa due o he fac ha he Cenral Bank issues he GDP daa on quarerly basis. Descripion of Variables Sock marke developmen is measured by he sock marke size and liquidiy on Colombo Sock exchange. The proxies for sock marke size are; (1) Marke Capializaion Raio (MCR) and (2) changes in he number of domesic lised shares (COM). Marke Capializaion Raio is derived by dividing he value of lised companies by GDP. (3) Toal Value Traded Raio (STR) and (4) Turnover Raio (TR) were seleced o represen sock marke liquidiy. Toal Value Traded raio (STR) calculaed by dividing he oal value raded from he GDP and Turnover Raio (TR) obained from Toal value of shares raded during he period divided by he oal marke capializaion of he period. This sudy uilized Changes in he GDP based on consan price as an indicaor for he growh of Sri Lankan economy. For example, Caporale, Howells & Soliman (2004), Boubakari & Jin (2005) Nowbusing & Odi (2009), Filer e al. (1999) used Marke capializaion raio as a variable for represening sock marke size and value raded raio, urnover raio as proxies for marke liquidiy. In 1999, Filer e al. used Changes in he number of domesic lised shares for indicae sock marke size. 266

5 Mehods As his sudy involves ime series daa for he invesigaion, i is necessary o look a wheher he daa series are saionary. This is necessary condiion for a linear regression model. For he purpose of esing he uni roo behavior of he daa series wo differen uni roo ess are applied namely, Augmened Dickey-Fuller (ADF) es and Phillips Perron (PP) es. The saisical properies of he wo ess are saed in equaions (1) and (2) respecively y a a y p a y i i (1) J 1 The Phillip Perron es involves fiing he following regression, y a 1 (2) i py i The null hypohesis of he es is ha he daa series are non- saionary Two or more series are hemselves non saionary, bu a linear combinaion of hose could be saionary, and hen he series are said o be coinegraed (Engel & Granger (1987). In economics, coinegraion es uilizes o explain long run linkage beween wo or more variables. Therefore, we used Johansen Coinegraion es o explain wheher here is long run equilibrium beween Sock marke developmen and economic growh. The Trace es and Maximal Eigen value are he join ess ha infer he null hypohesis of no coinegraion (H 0 : r = 0) agains he alernaive hypohesis of coinegraion (H 1 : r 0). The es resuls, if provides evidence o rejec H 0, i indicaes he exisence of long run equilibrium beween sock marke developmen and economic growh. Caporale (2004), Liu and Sinclair (2008), Buelens e al ( 2006), Bayar e al (2014), Iskenderogul e al (2011),Tang (2013), Osamwonyi & Kasimu (2013), Shahbaz (2008) also employed Johansen coinegraion o invesigae long erm linkage beween economic growh and sock marke developmen. To analyze causaliy beween economic growh and sock marke developmen, his sudy employed Granger causaliy es. Granger causaliy es was originally processed by Granger (1969), and hen was developed by Hamilon (1994). Granger causaliy es invesigaes he direcion of relaionship beween wo variables. Granger-Causaliy means he lagged Y influence X significanly in equaion (3) and he lagged X influence Y significanly in equaion (4). The es involves esimaing he following simple equaions (3) (4), n n X ai y i j X j 1 i 1 j 1 m m Y i y i j X j 2 i 1 j 1 Tes Resuls As saed above in esing Saionariy of sock marke and economic growh indicaors, we use he ADF es and PP es. The saisical oupu of he ess is presened in Table 1. Imporanly, boh ADF and PP es resuls demonsraed ha in level series of GDP is saionary a 1% significan level and TR is saionary a 5% significan level in full period and war period. I is seen ha he firs difference series of GDP and TR are saionary in full period, war and pos war period. On he oher hand, COM and STR are saionary a (3) (4) 267

6 1% significan level in war period under wo echniques and pos war series of MCR is saionary a 1% significan level shows ha he saionary under ADF es. However, all non-saionary variables become saionary in firs differen series under boh ess a 1% significan level. Table 1. Tes resuls of he uni roo ess for he full sample periods and war period and pos war period Variable Series 2004/2014 War Period Pos war ADF PP ADF PP ADF PP sa sa sa sa sa sa GDP Level -6.57* * -8.61* * * 1 s -6.21* * * * * MCR Level * s -6.19* -6.23* -6.14* -6.14* -4.37* -3.24** STR Level * -3.88* s -3.28** -7.64* * ** -4.83* TR Level -3.08* -3.07* -4.18* -4.28* s -10.0* -10.0* -6.83* -8.82* -4.54* -4.86* COM Level * -4.71* s -9.20* -9.17* -7.29* -7.59* -6.12* -6.14* 1% = % = % = % = % = % = 3.88 Noes:* (**) shows significan a 1% (5%) significan level The resuls of Johansen Coinegraion es for full period, war period and pos war period are summarized in he Table 2. Table 2. Resuls of Johansen Coinegraion es Trace Tes Maximal Eigenvalue Variables H 0 Tes Sa 5% C. V. Tes Sa 5% C. V. GDP & MCR r = r GDP & COM r = r GDP & STR r = r GDP & TR r = r War period GDP & MCR r = r GDP & COM r = r GDP & STR r = r GDP & TR r = r Pos war period GDP & MCR r = r GDP & COM r = r

7 GDP & STR r = r GDP & TR r = r Noe: r indicaes he number of coinegraing vecors The es resuls demonsraed ha he GDP was coinegraed wih sock marke proxies in full period as well as war period and pos war period under Trace saisic and Maximal Eigenvalue a boh of zero and one vecors. The resuls of Johansen es sugges ha he long run relaionship beween economic growh and sock marke developmen over he period of 2004 o 2014 and same relaionship exis in war and pos war period. The empirical resuls of Granger causaliy es are shown in Table 3. In he period of 2004 o 2014, indicaed ha here is a one way causaliy beween economic growh and sock marke developmen in Sri Lanka. MCR, STR and TR were cause o GDP. On oher hand, GDP appears o cause on COM. During he war period, MCR and TR have a cause link o GDP and GDP has a cause link o STR. The pos war resuls indicae ha GDP has causaliy on MCR, STR, and COM variables and TR has causaliy on GDP. The resuls of war and pos war resuls also confirm he unidirecional causaliy beween economic growh and sock marke developmen in Sri Lanka. The variable TR has srong impac on economic growh during hree periods which considered in his sudy. Furhermore, GDP appears o cause on hree sock marke proxies afer he war. Namely, MCR, STR and COM bu in war period sock marke proxies were cause o economic growh. Table 3. The resuls of Granger causaliy es Direcion 2004/2014 War Period Pos war Period P value P value P value MCR GDP ** * GDP MCR ** STR GDP ** GDP STR ** ** TR GDP ** ** * GDP TR COM GDP GDP COM ** ** Noes:* (**) shows significan a 5% (10%) significan level Conclusion The main purpose of his paper is o examine he long run relaionship beween economic growh and sock marke developmen. The findings revealed he exisence of long run relaionship beween economic growh and sock marke performance during he full sample period as well as war period and pos war period. Ineresingly, no differences in resuls observed during war period and pos war period. These findings imply ha he sock marke developmen is largely conribuing for he economic developmen. The es confirmed exisence of long run equilibrium relaionship beween GDP and he sock marke proxies used in his paper. The causaliy es revealed ha here is a causal relaionship beween GDP and sock marke developmen indicaors. The finding is useful for he sock marke analyss who conduc forecasing of sock marke performance for invesmen decisions. The finding also suggess ha one can use hese forecasing resuls 269

8 of sock marke performance in forecasing fuure economic growh prospecs in he economy. More imporanly, here is no significan difference in he findings during war period and pos war period. Thus, i can be concluded war siuaion or pos war environmen no maers for he long run relaionship beween sock marke developmen economic growhs. This finding can be generalized o he oher counries ha experienced civil war globally and findings of his paper provide scienific evidence in formulaing economic policies for various sakeholders. Reference Ahapahu, A. R., & Jayasinghe, P. (2012). Sock marke performance and economic growh: he case of Sri Lanka. Paper published a he e reposiory on Universiy of Colombo, Sri Lanka. Bayar, Y., Kaya, A., & Yildirim, M. (2014). Effecs of sock marke developmen on economic growh: Evidence from Turkey. Inernaional Journal of Financial Research, 5(1), Boubakari, A., Jin, D. (2010). The role of sock marke developmen in economic growh: evidence from some Euronex counries. Inernaional Journal of Financial Research, 1(1), Biswal, P. C., & Kamaiah, B. (2000), On Sock Marke Developmen, Banks and Economic Growh in India. Working Paper No.69, Insiue for Social and Economic Change, Bangalore. Buelens, F., Cuyvers, L., & Nieuwerburgh, S.V. (2006). Sock marke developmen and economic growh in Belgium. Exploraions in Economic Hisory, 43, Caporale, G. M., Howells, P. G., and Soliman, A. M. (2004). Sock Marke Developmen and Economic Growh: The Causal Linkage. Journal of Economic Developmen, 29(1), pp Goldsmih, R.W. (1969). Financial srucure and developmen. Yale Universiy Press. New Haven, CT. Gurley, J., & Shaw, E. (1955). Financial Aspecs of Economic Developmen. American Economic Review, 45, Harris, R. (1997). Sock marke and developmen: A re-assessmen. European Economic Review, 41(1), pp Jahfer, A., & Inoue, T. (2014). Sock marke developmen and economic growh in Sri Lanka. Inernaional Journal of Business and Emerging Markes, 6(3), Liu, X., & Sinclair, P. (2008). Does he linkage beween sock marke performance and economic growh vary across Greaer China?. Applied Economic Leers, 15, McKinnon, R. I. (1973). Money and capial in economic developmen. Brookings Insiuion Press. Nieuwerburgh, S.V., Buelens, F., and Cuyvers, L. (2006). Sock Marke Developmen and Economic Growh in Belgium. Exploraions in Economic Hisory, 43(1). pp Nowbusing, B. M., & Odi, M. P. (2011). Sock marke developmen and economic growh: he case of Mauriius. Inernaional Business & Economics Research Journal (IBER), 8(2). Osamwonyi, I.O., & Kasimu, A. (2013). Sock marke and economic growh in Ghana, Kenya and Nigeria. Inernaional Journal of Financial Research, 4(2), Shahbaz, M., Ahmed, N., & Ali, L. (2008). Sock marke developmen and economic growh: ARDL causaliy in Pakisan. Inernaional Research Journal of Finance and Economics, 14(1), Shaw, E. S. (1973). Financial deepening in economic growh. Oxford Universiy Press. New York. Srinivasan, P., & Prakasam, K. (2015). Sock Marke Developmen and Economic Growh in India: An Empirical Analysis. Inernaional Journal of Finance & Banking Sudies, 5(3), Tang, C.F. (2013). The linkage beween sock price and economic growh in Ausralia: A chickenand-egg paradox?. Economic Research, 26(2), Vazakidis, A., & Adamopoulos, A. (2009). Sock Marke Developmen and Economic Growh. American Journal of Applied Sciences, 6(11) Wang, B., & Aji, D. (2013). Sock Marke and Economic Growh in China. Economics Bullein, 33(1),