The Long Term Relationship Between Economic Growth and Stock Market Development a Causality Analysis for 20 OIC Member Countries

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th Lng trm Rlainhip

bwn enmi Grwh andsk Mark Dvlpmn: Acaualiy Analyi fr 20 oIcmmbr unri

Zurina Shafii ad Azlina Abd. Aziz

Abra: Thi tudy exaie the g-ru reatihip betee ei grth

ad tk arket deepet r 20 oIc eber utrie. Pae data r1989 t 2006 a exaied thrugh itegrati etiati predure that a

detet the exitee g-ru reatihip betee the ariabe. The Jhae

itegrati ethd a ued t deterie the exitee itegrati

reatihip ag the ariabe uder iderati. our reut idiate that

uh reatihip exit ag the ariabe i maayia, Uited Arab Eirate,Turkey, Egypt, Bahrai, ad Uzbekita. I additi, bth i Egypt ad Uzbekita,

e itegratig etr a ud uig the ae ethd aayi. Thi

idiate that e ariabe ud aue the urree ther ariabe/ i aua

aayi ere duted.

JEL Classification: D 53, G 23, N 25 , P 47 .

I. Inrduin

with the ireaig ize ad iquidity tk arket, their reatihipt ei grth i rth exaiati. leie ad Zer (1998) ud

Zurina Shafii, leturer i the fauty Ei ad muaaat, Uieriti sai Ia

maayia, maayia.

Azlina Abd. Aziz, leturer i the Ei Departet, fauty maageet ad

Ei, Uieriti maayia, Treggau, maayia.

© 2009, international association for islamic economics

Review of Islamic Economics , v. 13, n. 1, 2009, pp. 199–206.



200 Review of Islamic Economics, v. 13, n. 1, 2009

pitie ad igifiat rreati betwee tk arket deepet ad

g-ter grwth. There are tw h f thught the reati f tk

arket deepet ad ei grwth: e hd that tk arketdeepet i iprtat fr ei grwth, the ther hd that it i

t. Greewd ad sith (1996) hwed that tk arket wer the

t f biizig aig ad faiitate aig thu prtig ei

grwth. Beiega et al. (1996), leie (1996) ad leie ad Zer (1998)

argued that tk arket iquidity pay a iprtat re i ei

grwth. o the ther had, Deirgu-Kut ad leie (1996) pited ut

that ireaed iquidity ay redue grwth ia the reduti i aig rate

due t uertaity abut aig ad aderey affet rprate gerae

aut f ietr’ ypia abut arket iquidity.Thi paper exted preiu reearh tk arket deepet

ad ei grwth by exaiig the g-ru reatihip betwee the

tw ariabe. If a g-ru reatihip i fud, peritee reatihip

betwee bth ariabe i eured. Thi kwedge i ita whe a reearher

wat t exaie whether tk arket deepet a aue ei

grwth i the g ru. The ethd ued i thi paper i deiged t

apture the hrt ad g-ter auaity betwee the tw erie. A tudy

that exaied thi ubjet i deepig utrie wa duted by

mhtadi ad Agarwa (2001) uig regrei aayi, whih etiated y the effet f tk arket deepet ad grwth withut atteptig t

k fr ay aua ik. Thi tudy exted their reearh by fferig re

pex aua reatihip whih wi tribute i thi area f reearh

aiey.

seti 2, the epiria apet f thi tudy, tai a diui

the eaure f tk arket deepet ad ei grwth ued

i thi reearh, ad it reiew the ethd epyed, uh a uit rt

tet ad itegrati tet. seti 3 preet the reut btaied fr ur

aayi, ad seti 4 draw e ui.

II. empirical Approach

I rder t eaure tk arket deepet, we tk market capitaizati

(mc) ad stk Turer (sT) a prxie. mc i ur ae i the rati f

apita fr a tk ited t GDP. It refet the ize f the tk arket

i reati t the ize f the ey. sT eaure the ize f tradig i

reati t the ize f the arket, i.e. the iquidity f the arket. Higher

iquidity ea higher ue f tradig exit i a arket a pared



201Review of Islamic Economics, vo. 13, no. 1, 2009

to a iatie arket. Gro Doeti Produt (GDP) at bae year 2000

eaured i Us doar a ued a a proxy or eooi groth.

The data a opied ro the word Bak databae, wordDeeopet Idiator (wDI), hih otai rih data o a the

eooie i the ord. soe data i aaiabe ro the year 1963, but i

reatio to arket apitaizatio ad tok turoer, opete data or the

eooie diued i our reearh are oy aaiabe ro year 1989 uti

2006, ad thi paper i baed o thoe data.

The tet o the aua reatiohip betee GDP eru mc ad GDP

eru sT a oduted i three tage. firt, a tet a arried out to

aertai the order o itegratio i a ariabe. sie the tie pa o the

idiidua erie i reatiey hort, pae uit root tehique ere utiizedto ireae the poer o uh tet. next, haig etabihed the order o

itegratio i the erie, the pae oitegratio tet ere arried out to

ietigate the exitee o og-ru reatiohip betee the ariabe.

2.1. Panel unit root tests

I thi paper, uit root a utiized uig the leie et al. (2002) llc tet.

The llc tet i a pae erio o the Augeted Dikey fuer tet, ad i

baed o aayi o the equatio:

it t iiit t iit y y ερδθa ++++=∆ −1, i = 1,…, N t = 1,…, T (1)

here i repreet a outry ad t a period o tie. The tet ioe the u

hypothei o 0:0 =i H ρ or a i agait the ateratie o 0: <= ρρi A H

or a i .

It i eeary to do the uit root tet i order to deterie hether the

erie ued otai a uit root, eaig that it ha a oo ator that

deiate the ea ad ariae aay ro zero, hih i udeirabe or ourpurpoe. I order to peror a oitegratio ad aua tet, the uit root

ha to be abet, i.e. the erie ut otai o uit root o that ea ad

ariae are oe to zero, idiatig e hok ad oatiity o the data

erie or 1989-2006. Ater etabihig that the erie otai o uit root at

a ertai ee o data (ee or diereed erio), e eed to tet or the

exitee o og-ter reatiohip betee a erie. Pae coitegratio

tet ere the purpoe.



202 Review of Islamic Economics, vo. 13, no. 1, 2009

2.2. Panl coingraion s

I the oetioa time-series ase, it is ommo to test or oitegratio

i the mutiariate system usig Johase’s (1998) maximum ikeihoodapproah. This proedure a be used to idetiy the umber o

oitegratig reatioships betee the ariabes o iterest. Hoeer,

the poer o the oetioa test i mutiariate systems ith sma

sampe sizes a be seerey distorted. To address this issue, thereore, it is

eessary to ombie the data aross idiidua members, rom time series

as e as ross-setio data. for this purpose, i this study, the larsso et

al . test (2001) as utiized. They test the u hypothesis that there are at

most r oitegratig reatioships amog the p ariabes. That is, the u

hypothesis is ritte as:

H0: rak (

iΠ ) = r

i ≤ r or a i = 1,…, N, (2)

first, the hypothesis that r = 0 is tested. I this hypothesis ais, the hypothesis

that r = 1 is tested. This proedure is otiued uti the hypothesis u is

ot rejeted.

III. empirical Rsuls

3.1. ts rsuls for panl uni roo

The resuts o the pae uit root tests are summarized i Tabe 1. The resuts

sho that the u o a uit root i the llc aot be rejeted i ay o the

reeat ariabes. whe this happes, e aot be ertai that the series

otais o uit root; the desirabe resuts e ish to ahiee require that

the data series hae mea ad ariae ose to zero, idiatig miima

shoks ad oatiity i the data.

The test aso suggests that the series i irst dierees are statioary,

i.e . otai o uit root. Thereore, the test suggests that a the series appearto be itegrated o order oe, i.e . uit root absee he the series ere

itegrated o order oe, I ( 1) oer the sampe uder osideratio.




table 1: Panel Uni Roo tess

Note : figure i the parethee are p-aue.

3.2. tes resuls for panel coinegraion es

Ater doig the uit root tet, the exitee o oitegratig reatiohip

betwee GDP, mc ad sT oud be ietigated. I the oetioa tie-

erie ae, it i oo to tet or oitegratio i the utiariate yte

uig Johae’ (1988, 1991) axiu ikeihood approah. Thi proedurea be ued to idetiy the uber o oitegratig reatiohip betwee

the ariabe.

for the reao gie aboe, it wa eeary to obie the data aro

idiidua eber, ro tie erie a we a ro-etio data. for thi

purpoe, i thi tudy the laro et al . (2001) tet wa utiized. laro et

al . (2001) propoed a ikeihood-baed pae tet o oitegratio rak i

heterogeeou pae ode baed o the aerage o the idiidua rak

trae tatiti deeoped by Johae (1995).The reut o the oitegratio

tet are how i Tabe 2. The tabe report outry-by-outry (Johae’tet) ad pae oitegratio tet (laro’ tet) reut.

Gie the o-tatioarity o the ariabe at their ee order, the

exitee o oitegratig reatiohip betwee GDP , MC ad ST ad the

uber o oitegratig etor a be ietigated. see Tabe 2. The ou

abeed r = 0 tet a u o o oitegratio, whie r = 1 ad r = 2, reer to

a u o at ot oe ad two oitegratig etor, repetiey. Due to the

a ape, T = 18, the ag egth wa hoe i a ae to be equa to 1.

A etioed aboe, the Johae oitegratio ethod i ued to

deterie the exitee o oitegratio reatiohip aog the ariabe



204 Review of Islamic Economics, v. 13, n. 1, 2009

uder ciderati. The trace tet reject the hypthei f citegratig

ectr (r = 0) at the 5 percet ee i maayia, Uited Arab Eirate, Turkey,

Egypt, Bahrai, ad Uzbekita. Thee reut idicate that a citegratigreatihip exit ag the ariabe i the cutrie idicated. Thu,

g-ru etabihet ca be etiated betwee ecic grwth, arket

capitaizati ad tck turer i the cutrie idicated.

table 2: Johanen te saii and Laron et al., (2001) Panel

coinegraion te beween GDP, Mc, and st.

counry

trae saii Ho: rank = r

r = 0

( 34.91)

r = 1

(19.96)

r = 2

(9.24)

Rank (ri )

Individual countries’ trace statistics

maayia 36.01964* 6.98902 1.33096 1

Ideia 28.73168 6.23890 0.19831 0

suda 10.90114 0.38242 0.00030 0

Uited Arab Eirate 42.43188* 4.10871 0.00082 1

oa 29.40025 0.51587 0.09043 0

Kuwait 9.53466 0.83702 0.13081 0

saudi Arabia 9.45953 1.04902 0.24724 0

Turkey 34.96034* 5.57002 0.08127 1

Ira 24.82841 6.77458 0.00036 0

nigeria 34.16390 5.31699 0.91717 0

Kazakhta 22.89026 3.92541 1.58028 0

Pakita 23.24230 4.50969 1.57294 0

Egypt 58.94186* 25.03024* 0.03899 1

Bahrai 42.43188* 4.10871 0.00082 1

Tuiia 28.57809 1.22707 0.14558 0

mrcc 20.28657 3.23487 0.05668 0

Bagadeh 18.90558 6.25116 1.66627 0

Uzbekita 40.23598* 13.08338* 0.38271 1

Jrda 20.81852 7.18243 1.71187 0

leba 18.66764 4.14041 1.30814 0

The panel test statistics

NT LR 27.7715 5.5238 0.5731

tet 11.5251 -0.7746 -1.6956 1

E(Zk ) 14.9550 6.086 1.137

var(Zk ) 24.7330 10.535 2.212

n 20 20 20

Notes: (i) r dete the uber f citegratig ectr; (ii) the pae rak tet ha a criticaaue 1.96 at 5% ee; (iii) ‘*’ idicate rejecti f the u hypthei f rak equa t r at

a 5% ee f igificace.

LRY




The tet ao eea the ube o oitegatig eto that

otibute to the og-u eatiohip betwee the aiabe. fo Egypt

ad Uzbekita, it a be oied that at eat oe oitegatig etoexit i the eie with the poibiity o two oitegatig ato. Thi

ea that wee aua aayi to be peoed, we kow that oe

aiabe woud aue aothe aiabe i the data eie o Egypt ad

Uzbekita.

Howee, the eut eeaed that o outy ha two oitegatig

eto that otibute to the og u eatiohip aog the aiabe,

ie the tet peoed aied to ejet o r =2 o a outie.

IV. summary and conluionI uay, we oud that thee i a og-u eatiohip betwee

eooi gowth, aket apitaizatio ad tok tuoe i maayia

Uited Aab Eiate, Tukey, Egypt, Bahai, ad Uzbekita. The eut

ao ugget that thee outie hae oe oitegatig eto that a

be uthe exaied i aua aayi. caua aayi i a oe poweu

too that expai whethe oe aiabe aue aothe aiabe’ behaiou.

futhe tudy o aua aayi o whethe tok aket deeopet a

aue eooi gowth a be exteded o ou aayi o the og u

eatiohip by peoig the Gage-cauaity tet.

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Edio, Hai; leie, r.; rii, lua ad sok, Thote (2002). “Iteatioa fiaia

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The Long Term Relationship Between Economic Growth and Stock Market Development a Causality Analysis for 20 OIC Member Countries