Abstract:
The financial markets have played a crucial role in the country's economic life for a long
time. The objective of this study was to examine the empirical relationship between stock
market development and economic growth in Sri Lanka. This study used annual time series
data for the period from 1990 to 2018 which were collected from the annual reports of the
Colombo Stock Exchange (CSE) and the Central Bank of Sri Lanka. The data were analyzed
employing co-integration test, and vector error correction model (VECM). The results of
VECM revealed that stock market capitalization, foreign direct investment, and inflation
have a significant impact on economic growth, while turnover has not significantly
influenced economic growth. The findings of the study have an important implication for the
economic policymakers and government of Sri Lanka to enhance economic growth. Further,
research can be extended by choosing more periods of data and choosing other indicators of
stock market development indicated in previous studies.
