Chapter # 2: Literature Review

To fortify our current research topic, the outlines founded on the work of the previous

scholars have been discussed in this section.

Stock market is a pointer of an economy financial status. It reflects the current status of the

investors in the stock market. Stock market carries high significance in the matter of economic

Growth, stock market growth positively effects the economy of the related country.

For investors the terms GDP and Inflation are of great value. The investors take these into

account as a surgeon would take the medical condition of a patient into account before a surgery.

Gross Domestic Product (GDP) is a comprehensive measurement of a state’s complete economic

movement. GDP is the monetary value of finished goods and services domically produced within

a country. Inflation refers to a general and persistent rise in the price level of goods and services

of an economy. In other words, it depreciates the value of money.

According to the theory of (Fama, 1970) the information available in the stock market is fully

reflected by the stock prices as the all the information is freely available to the investors. It is

based on the assumption that the stock market information is available on negligible cost and

thus prices are always rightly placed in the market.

This theory provides a good explanation about the role of stock market (market capitalization) in

the economic growth of the country. When the resources in the economy are efficiently assigned

in the economy it will promote in the positive economic growth of the country. When the

resources in the economy are efficiently assigned in the economy it will promote in the positive

economic growth (Chepkoech, 2014).

Endogenous Growth Theory argues that the development of an economy is occur through the

direct results of internal process and no outside force is involved in this. This theory notes that

more investments in the human capital will lead to the economic growth by means of effective

and efficient production. According to the theory, stock market development (market

capitalization) will results in higher economic growth by the impact of productivity and

investment level in the economy.

Singh, Mehta, and Varsha (2011) had given a research on macroeconomic factors and stock

returns proof from Taiwan. This examination is an attempt to inspect for Taiwan the easygoing

connection between file returns and certain urgent macroeconomic variable to be specific

business rate, conversion scale, GDP, Inflation and cash supply. Secondary information of stock

file was taken from 2003 to 2008 and was gathered from authority site of Taiwan Stock

Exchanges. Test estimate was of organizations utilized in the development of Taiwan 50 Index

during the year 2003 to 2008. It is seen that exchange rate and GDP have extraordinary impact

on the profits of organizations recorded in Taiwan 50 Index while inflation rate has critical

impact just for PBR arrangement of little organizations.

Jareño and Negrut (2016) conducted a research on the US stock market and macroeconomic

factors. The quarterly data for the study has been collected from the 2008-2014 and the data for

the independent variables collected from the Eurostat website and National Bureau of Economic

Research and dependent variable from Yahoo Finance page. The results of correlation analysis

indicated that GDP and Industrial production Index has a significantly positive impact over the

stock market while unemployment and interest rate shown a negative impact over the stock

market.

Ikikii and Nzomoi (2013) conducted a study to determine the effects of stock market
development on economic growth of Kenya. By utilizing quantitative approach, the
quarterly data for GDP, market capitalization and trade volume from 2000 to mid-2011
has been gathered. The linear regression analysis was employed over the gathered to find
out the relationship between the variables. It was found that market capitalization and
trade volume are positively associated with the GDP and hence are positively associated
with economic growth.

Abdul-Khaliq (2013) carried out the research to find out the impact of stock market
liquidity on economic growth of Jordan. The 20 years data for the variables from 1991 to
2011 was collected from various sources. By using the Ordinary Least Square model, the
results shown that the market capitalization to GDP has no significant impact on
economic growth but liquidity turnover ratio has a significant impact on the economic
growth.

Kolapo and Adaramola (2012) examine the impact of stock market on economic growth
of the Nigeria. The GDP was taken as dependent variable and market capitalization, new
issues, value of transactions, total listed equities and government stocks. The Johansen-
Co-integration and Granger Causality test were applied on the data for the 1990-2010.
The results shown that the activities of these variables in the stock market has a positive
impact on economic growth.

Alajekwu and Achugbu (2012) tried to investigate the impact of stock market
development on economic growth of the country. Using quantitative approach, the data
for the independent variables (market capitalization ratio, value traded ratio and turnover
ratio) and dependent variable (GDP) has been gathered from different sources for the
period 15 years from 1994-2008. The Ordinary Least Square (OLS) technique was
employed over the gathered data, the results of the analysis shown that the market
capitalization and value traded has ratios have a weak relation with the economic growth
while turnover ratio found to be one which shoot the economic growth.