Report on Relationship Between Economic Growth and Stock Market in Bangladesh

1 January 2017

This paper examined the relationship between stock market development and economic growth of two Asian developing countries, that is, Pakistan and Bangladesh, after the liberalization period of 1990s. The relationship measured were in terms of size (market capitalization), liquidity (total value of stocks traded and stock turnover ratio) and volume (total number of companies listed in the stock exchange of each of the country). The study of comparative analysis was done with the help of tables and charts.

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The econometric results of the study by employing the regression analysis showed that Pakistan stock markets contribute to the economic growth in terms of the large size of its stock market whereas Bangladesh stock market contributes to the economic growth in terms of the liquidity of its stock market. Bangladesh economic growth was found to be comparatively better than economic growth of Pakistan. The study revealed that the stock markets in Pakistan and Bangladesh do not play a major role in the economic growth but rather, these financial institutions are the driving forces for the economic growth of the country.

Stock markets play a crucial role in global economics and corporate finance where the financial markets generate finance for the economic growth of the country. Bangladesh has two stock exchange, that is, Dhaka Stock Exchange (DSE) & Chittagong stock exchange(CSE). Stock exchange of a country is the financial institution that deals with financial instruments. It was important to answer the increasing number of the critical questions regarding stock market performance and economic growth, for instance, do the stock exchanges of the countries affect on the economic growth of a country, if yes then how?

This study highlights certain factors that can be used to measure the stock market development and its effect on the country’s economic growth. Besides this, it was important to study. This study analyses the effect of Pakistan and Bangladesh stock market development on their respec-tive GDP per capita by considering three of the stock market indicators, that is, market capitalization, total value of stocks traded, stock turnover ratio and lastly total number of listed companies. Objectives ii. To examine the effect of stock markets development on the economic growth of Bangladesh. i. To compare the stock markets development and economic growth of the previous year.

Numerous studies provided both negative and positive evidences of the stock market development and the economic growth. Mishkin (2001) stated that a well established, managed and organized stock market brings investment opportunities in the country by implementing the productive projects that ultimately results in the economic activity, mobilizing savings, diversifying risks and allocating effective capital.

Liquidity measurement was defined as the measure to check the ability of the stock market to deal with the large number of stocks traded, irrespective of any drastic changes in price levels. Nowbutsing and Odit (2008) defined total stock value traded as the firm’s equity traded in an organized manner so that it would results in the national output. According to Kyle (1984) and Holmstrom et al. (1998), the more stock market is liquid the more it will be efficient in delivering the accurate and timely information to the inside and outside investors.

According to Levine (1991), developed and organized stock market reduces the productivity and liquidity of the businesses. Amaral and Quintin (2007) argued that the stock market development enhance the economic growth by making capital productive, and ensuring its best use. According to Aysan (2006), high capital degree of undeveloped financial sector increases the growth volatility of a country. The stock market development is the most significant factor that leads to the economic growth (Shahbaz et al. , 2008).

The endogenous economic theory states that improved policy measures with innovation, competition, changes, openness and research and development will lead to the long run economic growth of the country. Theory identifies the two major factors of economic growth, that is, human capital and technology. Specialization, training and experience increases the productivity of the country whereas, advanced technology and innovation reflect the structural changes in the system. According to Hansson et al. (1997), human capital and technology may depend on the function and structure of the financial institutions.

Earlier, the stock markets of both Pakistan and Bangladesh were manually operated but currently they are electronically based and equipped with specialized human force that would result in the effective performance and added national output of the sector. Hypotheses H1: Stock markets development has significant effect on the economic growth of Pakistan. H0: Stock markets development has no significant effect on the economic growth of Pakistan H2: Stock markets development has significant effect on the economic growth of Bangladesh. H0: Stock markets development has no significant effect on the economic growth of Bangladesh

The samples had been randomly selected and indicators for accessing the relationship between stock market and economic growth included one dependent variable, that is, GDP per capita growth in US$ (in millions) and four independent variable, that is, market capitalization in US$ (in millions) as a measure of stock market size, total value of stock traded (in percentage of GDP) and stock turnover ratio (in percentage) as a measure of liquidity of the stock market and volume of the stock market determined through the total number of listed companies.

Log transformation with the stepwise method was applied on the independent variables of Pakistan and Bangladesh. GDP per capita is measured as GDP divided by the total population of the country. GDP measures the standard of living of the people in the country. Market capitalization is the value and size of the corporation or business, more productive capital in a country results into more economic growth will be resulted. It is measured by multiplying the outstanding shares of the company by their share price.

Total value of stock traded referred to the total number of shares that is traded in the market, times their respective prices, and stock turnover ratio is calculated by dividing the total value of stock traded by market capitalization. Lastly, the volume of the stock market was examined by the total number of all the listed companies in Pakistan and Bangladesh over the period of 1990 to 2009. To collect the data, the supplement source used is World Bank Indicators. This study examines with an assumption, that is, the sample selected for the research is truly representative of the population.

This research could be more refined if the quarterly data is used so that exact analysis can be done. Bangladesh economic growth analysis The results in Table 2 indicates that as total stock value traded increases by 1%, the estimated increase in the mean or average GDP per capita is about 114% points, and if the value of the total stock value traded in Bangladesh was fixed at zero, the mean GDP per capita of Bangladesh would be about 342% points, that is, GDP per capita of the country would be very high.

The results shows that the Bangladesh stock market is small in size and is very liquid and deals with a fairly large number of stocks traded without any drastic prices affect. Moreover, total stock value traded and real GDP per capita of Bangladesh have a positive relation in between them. It has been evaluated that different countries with respect to their economic growth were influenced by different sector performances due to the difference in the economies of their country. Economic growth of Pakistanhas been influenced by market capitalization and Bangladesh by total stock value traded.

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