Stock Market Liberalization, Stock Market Performance and Economic Growth in Kenya

Abstract

The study empirically examined whether stock market liberalization, by improving the functioning of domestic stock market accelerates economic growth in Kenya. The study also evaluated the nature of the relationship between stock market performance and economic growth in Kenya. The stock market liberalization and performance were measured using two variables namely stock market size as measured by stock market capitalization and stock market turnover respectively. The study used quarterly time series data collected through secondary sources and covered a period .of 22 years from January, 1991 to December, 2012. The study utilized econometric techniques of Vector Autoregressive (VAR) and Granger Causality Tests to explore the relationships. The empirical results showed a uni-directional causal link that runs from stock market development to economic growth and there is evidence of an indirect transmission mechanism through the effect of stock market development on investment. The study found that stock market liberalization has a significant positive impact on the economic growth in Kenya. There is a strong case for policy recommendation to further develop the stock market as a driver of economic performance in Kenya.