Stock Market Performance and Economic Growth-a Causality Test Approach: an Empirical Evidence from Kenya

The investigation of the causal relationship between stock market performance and economic growth was conducted using the popular Granger causality test based on the Vector Autoregressive (VAR) model. The statistical techniques used include the unit root Augmented Dickey Fuller test in order to fulfill the objective of stationarity for all the time series in their levels and first differences. The Johansen co-integration test was used to investigate whether the variables are cointegrated of the same order taking into account the trace statistics and the maximum eigen-value tests. The variables were found to be cointegrated with at least one co-integrating vectorThe findings imply that the causality between economic growth and stock market runs unilaterally or entirely in one direction from the NSE 20-share index to the GDP. From the results, it was inferred that the movement of stock prices in the Nairobi stock exchange reflect the macro-economic condition of the country and can therefore be used to predict the future path of economic growth. Therefore, policy makers should facilitate proper growth of the stock exchange market in order to foster a thriving economic climate.