The impact of stock market performance on economic growth in Malawi

ABSTRACT

This study investigated the causal relationship between the performance of the Malawi Stock

Exchange (MSE) and economic growth in Malawi using quarterly data for the period 2003 to

2017. Stock market performance was measured using four indicators: the all share price index,

total stock market capitalisation, stock market liquidity, and the number of shares traded.

Economic growth was measured by real Gross Domestic Product (GDP). The Autoregressive

Distributed Lag (ARDL) model was used to test for the existence of a long- run co-integrating

relationship between the variables, while Granger causality tests, impulse response functions

and variance decomposition analyses were employed to examine the short- run dynamics.

The co-integration tests found no evidence of a long-run relationship between real GDP and all

measures of stock market performance. However, there was evidence of the existence of shortrun

relationships, with a positive and significant contemporaneous relationship noted between

real GDP and stock market capitalisation and a negative and significant relationship between

real GDP and market liquidity. The Granger causality tests revealed the following

intertemporal relationships: bidirectional causality between real GDP and stock market

liquidity and unidirectional causality from stock market capitalisation to real GDP and changes

in the all share price index to real GDP. The impulse response functions and variance

decompositions further revealed real GDP reacts highly to a shock in market capitalisation than

to other variables and a shock in real GDP causes a higher fluctuation in liquidity than in any

other variables. The findings of this study thus show that there is short-term causality between

the performance of the MSE and economic growth in Malawi albeit that no long-run

relationship exists. In light of these results, specific policy recommendations are provided for

various stakeholders so as to enhance economic growth in Malawi. Suggestions for future

research are also given.