Capital Market and Economic Growthnexus in Sri Lanka: Johanson Cointegration Approach

ABSTRACT : The Capital Market is the market for trading assets for greater than one year, facilitatinglongterm funds.It primarily encourages the effective mobilization of savings into investments, thereby contributing to economic growth.The paper attempts to investigate the impact of the Sri Lankan stock markets on the country’s economic growth from 1990 to 2019 using Johansen cointegration and Granger causality checks.The results confirm that the Sri Lankan stock market and economic growth are cointegrated,which means that the financial market and economic development in Sri Lanka have a long-term relationship. The causality findings suggest unidirectional causation between the GDP and Market Capitalization(MC), Number of Shares Traded (NS) and Value ofShares Traded,indicating that the stock market has a favorable effect on the country’s economic development. Initiation of policies would encourage more companies to access the market and be more proactive in their surveillance role to check sharp practices that undermine market integrity and erode investors’ confidence.
KEYWORDS: Capital Market; Economic Growth; Market Capitalization; Number of Shares Traded; Value of
Shares Traded