Stock Market and Economic Growth: an Empirical Analysis for Germany

Topics: Economics, Stock market, Stock market index Pages: 4 (1096 words) Published: February 15, 2013
Stock Market and Economic Growth: An Empirical Analysis for Germany Adamopoulos Antonios
Department of Applied Informatics, University of Macedonia, Thessaloniki, Macedonia, Greece Correspondence to: Adamopoulos Antonios,
Published online: April 15, 2010
This paper investigates the causal relationship between stock market development and economic growth for Germany for the period 1965-2007 using a Vector Error Correction Model (VECM). The purpose of this paper was to examine the long-run relationship between these variables, applying the Johansen co-integration analysis based on the classical unit roots tests. The results of Granger causality tests indicated that there is a unidirectional causality between stock market development and economic growth with direction from stock market development to economic growth.

Keywords: Stock market; Economic growth; VAR model; Granger causality. 1. Introduction
Stock market development has been the subject of intensive theoretical and empirical studies [1, 2]. More recently, the emphasis has increasingly shifted to stock market indexes and the effect of stock markets on economic development. Stock market contributes to the mobilization of domestic savings by enhancing the set of financial instruments available to savers to diversify their portfolios providing an important source of investment capital at relatively low cost. A well functioning and liquid stock market, that allows investors to diversify away unsystematic risk, will increase the marginal productivity of capital [3].

Another important aspect through which stock market development may influence economic growth is risk diversification. Obstfeld [4] suggests that international risk sharing through internationally integrated stock markets improves the allocation of resources and accelerates the process of economic growth. Evolution of stock market has impact on the operation of banking institutions and hence, on economic promotion....
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