The Impact of Stock Exchange on Economic Growth: The Case of Mauritius Using VECM Approach.

Transcription

1 IOSR Journal of Economics and Finance (IOSR-JEF) e-issn: , p-issn: Volume 7, Issue 6 Ver. IV (Nov. - Dec. 2016), PP The Impac of Sock Exchange on Economic Growh: The Case of Mauriius Using VECM Approach. Saleh Juma Rashid* 1, Hongbing Ouyang 2, Ahmed Ramadhan Abeid 3, Yapaake Kossele Thales Pacific School of Economics, Huazhong Universiy of Science and Technology, Luoyu Road, Wuhan China 4. Universiy of Yaoundé II-SOA, Cameroon, Insiue of Governance, Humaniies and Social Sciences Absrac: This paper examines he impac of sock exchange on economic growh of Mauriius using ime series secondary daa covering he period of Co inegraion and vecor error correcion mechanism (VECM) was used o esimae he shor as well as he long run parameers afer ascerainmen of co-inegraion es. The resuls show ha here is no long run causaliy running from marke capializaion raio, urnover raio and value raded raio o economic growh. However, here is a shor - run causaliy running from urnover raio o economic growh and he res variables such as marke capializaion raio and value raded raio have no shor - run causaliy running o economic growh. These resuls will help he policy makers, local and foreign invesors in Mauriius sock marke exchange for he decision making. Keywords: Economic growh, Marke capializaion raio, Turnover raio, Value raded, Sock marke, Mauriius. I. Inroducion The sock marke is playing significan role in he capial mobilizaion and offers o he invesors and financial inermediaries hrough exchange he securiies. I also regarded as a liquid when large enries are ransaced wih minor effec on prices of securiies. Alile (1994) defined sock marke as financial inermediary abiliy o associae shorage o he surplus secors of economy and uilizaion and provision of invesmen beween compeiive uses which are criical o he developmen and effeciveness of he economy. Donwa and Odia (2010) argued ha he well-buil sock marke can be considered as one significan organizaion o promoe local and foreign invesmen. Wachel (2002) argued ha he evaluaion of he firm s asses hrough he invesmen exchange provides he sandards ha may be valuable for he managemen and shareholders resuling in expanding he power and capabiliy of companies resources. The sock exchange of Mauriius Ld (SEM) was esablished on March 30, 1989 under he Sock Exchange Ac 1988, as a privae limied company o promoe efficien and regulae securiies marke in Mauriius. SEM sared is operaion wih five lised companies wih marke capializaion esimaed abou 92 million dollars. Currenly here are 51 companies lised on Official Marke represening a marke capializaion of nearly USD 9.1 billion as a Ocober 31, During Ocober 06, 2008 SEM became a public company. The SEM operaes in wo markes oday: The Official Marke and he developmen and Enerprise Marke (DEM). The size of marke has grown from marke capializaion o GDP raio of less han 4% in 1989 o more han 75% a curren marke cap/gdp in economy. Currenly, he growh rae is 5% average during he las 25 years. The DEM has been launched on Augus 4, 2006 and here are 43 companies lised on his marke wih marke capializaion of nearly USD 1.3 billion as Ocober 31, Local invesors accoun isabou 60% of he daily rading aciviies and foreign invesors accoun are approximaely 40%. Moreover, 75% of local volume is generaed by insiuions as muual funds, pension funds and insurance companies. Also, SEM has a room for remoe membership wih he view o promoe membership from foreign brokers and foreign counerpars o he marke. Foreign invesors have been appeared as key players on he SEM accouning o 40% of he daily rading volumes of he exchange. SEM has srucured iself ino a muli-asse class inernaional securiies exchange and poise o hold he fuure wih renews opimism. In 2001, SEM become he firs exchange marke in Africa o move o a fully auomaed and elecronic sock marke infrasrucure which operae on one of he bes echnology currenly available in he exchange space worldwide. This indicaes he adopion of echnological plaform employed by SEM in he sock marke a he inernaional level. Today, SEM has managed o connec live o a op bracke of global brokers and dealers in he worldwide( aim of his paper is o examine he impac of sock exchange on economic growh of Mauriius. Following he inroducion, he objecives of sudy, he raionale behind of he sudy in secion I. Lieraure of review occupies he secion II. Maerials and Mehods in secion III, Resuls and Discussion occupy secion IV and secion V presens he conclusions and recommendaions. DOI: / Page

2 1.1 Objecive of he sudy The objecive of he sudy is o invesigae he impac of he sock exchange on economic growh in Mauriius. In addiion o ha, we wan o check wheher here is an exisence of posiive and significan relaionship beween sock exchange and economic growh; as well as long run and shor run causaliy. 1.2 Raionale of he sudy The raionale behind of his sudy is o assess he conribuion of sock exchange oward economic growh by bearing in mind ha few sudies have been done on sock marke in Mauriius. II. Review of Lieraure Shreya e al. (2016) examined he empirical analysis of he op 20 companies of lised on Bombay sock exchange for he period employed GARCH models. Their resul showed ha he reurns from he porfolio of 20 companies reveal high volailiy for he period They also found ha he Indian economy has fel due o he global financial crisis. Dakhlaoui and Aloui (2011) deermined he ineracive relaionship beween he U S economic policy uncerainy and B RIC sock markes covering period from July 4, 1997 o July 27, 2011 employed five models such as GARCH, EGARCH, TS-GARCH, P-GARCH and T- GARCH. Their resuls porrayed ha he mean reurn spillover beween he BRIC sock indices and US uncerainy was negaive as well as volailiy spillover indicaed o oscillae beween posiive o negaive values. They also argued ha i was very risk o invesors o inves in his marke. Abdullah e al. (2012) examined he causaliy beween sock and foreign exchange markes in Bangladesh from January 1993 o Augus 2010 using Granger causaliy es found ha here was no causaliy running from foreign exchange marke o sock marke. They advocaed ha policy makers should sop o inerfere foreign exchange marke so as o curb excessive volailiy in he sock marke of Bangladesh in he shor run. They also argue ha policy makers should use boh fiscal policy and moneary policy ools o seady boh marke. Pan and Mishra (2016) invesigaed on he relaionship beween Sock Marke Developmen and Economic Growh for he period from January 1991 o November 2015 for Shanghai and Shenzhen sock exchange employed ARDL model. Their resuls showed ha Global Financial Crises had a significan impac on boh China s real secor and financial secor. Moreover, hey argued ha Shanghai a share marke has a long run negaive relaionship wih he real secor of he economy. Pras and Sandoval (2016) examined on impac of Sock Marke and Economic Growh covering he period of 1995 o 2012 using Vecor Auoregressive Model (VAR). Their resuls indicaed ha here was posiive relaionship beween he sock marke growh variables such as marke capializaion raio, sock oal raded value and urnover raio o he economic growh. In paricular, he relaionship caused beween he financial variables and he economic variables was higher in Bulgaria, Hungary and Romania. Lin Lu e al (2016) examined he Sudy on he ineracive mechanism of economic growh, inflaion and capial markes using dynamic Bayesian facor graph for he period of on quarer - on - quarer daa from January 1991 o December Found ha he ransiion period of indusrializaion o economic financialisaion here was associaion ship beween capial marke and economic aciviy become closer and closer. They also argued ha policy makers should concenrae more on he sabiliy developmen of he financial marke and ransmission impac of capial marke. Moreover, hey also advocaed opimizing he srucure of radiional economy and capial marke in order o mainain balance developmen. Bilal e al (2016) invesigaed he Impac of Sock Marke Developmen on Economic Growh: Evidence from Lower Middle Income Counries for he period from 1990 o 2012 using Hausman es for analysis found ha here was a posiive and significan relaionship beween sock marke developmen and economic growh. Moreover, he findings showed ha here was posiive relaionship beween sock marke developmen and economic growh. They concluded ha financial marke can lead o make operaional policies for valuable channelizaion of economic growh. Belkaoui (2016) aimed o es Earning capaciy, Sock marke wealh effec and economic growh for he period from 1998 o 2001 using muliple linear regression approach. Their resuls porrayed ha sock marke wealh effec was negaive exaggeraed wih earning ediousness and earning opaciy was posiive associaion ship wih economic growh as well. Moreover, he impac of earning opaciy on economic growh is expeced negaive bu insignifican. Finally, he argued ha counries wih beer accouning qualiy creae a beer condiion for marke performance which enhances sepping up economic growh in he long run. Masoud and Hardaker (2012) deermined he impac of financial developmen on economic growh: Empirical evidence of emerging marke counries for he period from 1995 o 2006, using endogenous growh model. Their resul indicaed ha sock marke developmen has a remendous oucome on economic growh, and his effec remains ough even afer he conrol of banking secors and oher conrol variables. Moreover, he sudy observed ha here was sable long run equilibrium associaion ship beween he developmen of he sock marke and he evoluion of he economy. Ulimaely hey argued ha policy makers should keep in o accoun he deerminans of banks and sock markes developmen in order o faciliae economic growh in all counries and idenifying key condiions as good qualiy insiuions. Aregbeshola (2012) invesigaed on he role of local financial marke growh: Empirical evidence from hree African economic groping for he period from 1980 o 2012 using descripive DOI: / Page

3 saisics, uni roo ess, dynamic panel esimaions and Granger causaliy es. The resuls indicaed ha domesic financial markes play imporan roles in economic developmen of each of hese groupings, alhough in varying magniude. Moreover, he observed ha domesic financial marke plays minue role on he whole economic developmen of he hree groupings whils ineraced. Masoud and Hardaker (2012) observed he impac of financial developmen on economic growh: empirical evidence from India for he period from 1995 o 2006 using he Phillips Perron (PP) es and Augmened Dickey-Fuller -saisics (ADF). Their resuls showed ha sock marke developmen resul on economic growh and sock marke developmen has a significan role on economic growh and seady long-erm equilibrium associaion beween he progress of he sock marke and developmen of he economy. Hence hey argued ha governmen should concenrae o suppor he developmen of banking secors and sock marke and idenifying key facors for good qualiy insiuions. Kyereboah-Coleman (2008) highlighed he impac of macroeconomic indicaors on sock marke performance: Empirical evidence from Ghana sock exchange for he period from 1991 o 2005 employed Coinegraion and correcion model echniques. The resuls indicaed ha he lending raes from deposi money banks have an unfavorable effec on sock marke performance and mainly provide major obsacle o business growh. He also found ha inflaion rae was found o have a negaive effec on sock marke performance. Finally, he advised o he policy makers ha capial marke and sock marke o ake advanage of he differen opporuniies o cope wih challenges and ineres raes, inflaion mus be reduced. Pal and Mia (2011) invesigaed on impac of macroeconomic indicaors on Indian capial markes: Evidence from India covering he period of January 1995 o December 2008 using uni roo es, he co-inegraion es and error correcion mechanism (ECM) es. Their resuls indicaed ha here was co-inegraion beween macroeconomic variables and Indian sock indices which confirmed long-run associaion ship. They advocaed ha India s should give aenion o promoe equiy shares as leading financial insrumens. Abdul-Khaliq (2013) aimed o es he impac of sock marke liquidiy on economic growh: Evidence from Jordan for he period from 1991 o 2011 employed simple linear regression model. The resuls indicaed ha marke capializaion o GDP doesn exer significan effec upon he economic growh; however, urnover raio has significan effec upon he economic growh. Finally,he suggesed ha governmen should promoe sock marke liquidiy by propagaing educaion o he public regarding benefis by invesing in sock markes and higher liquidiy on sock markes and hence will lead o bus up economic growh. Ayopo e al. (2016) based on sock marke response o economic growh and ineres rae volailiy: Evidence from Nigeria for he period from January 1985 o December 2013 using exponenial general auoregressive heeroskedasiciy esimaion echniques. Their resuls showed ha sock prices ac in response significanly o innovaions in he ineres rae and he real gross domesic produc (RGDP). Finally, hey advocaed ha policy makers should consider volailiy in boh he ineres rae and he RGDP o he enhancemen sock marke developmen. Naik (2012) Examined he impac of sock marke developmen on economic growh: Evidence from emerging marke economies for he period from 1995 o 2012 using dynamic panel sysem GMM esimaors and uni roo es. The resuls showed ha sock marke developmen conribue significanly o economic growh. He also found a unidirecional causaion running from sock marke developmen o economic growh as well. Ulimaely he researcher argued o he policy makers ha here mus be good planned financial policy of sock markes raded domesically and inernaionally in order o bus up economic growh. Maria Francesca D. Tomaliwan (2013) focused on sock marke respond o domesic economic fundamenals and regional equiies markes: evidence from Philippine for he period from January 2006 o December 2013 using Auoregressive disribued lag (ARDL) mehod and vecor error correcion model (VECM). The resuls showed ha here was co-inegraion beween Philippine sock marke and abovemenioned facors which mean a long-run equilibrium relaionship ship exised. Moreover, he sudy showed ha in he Singapore sock marke affecs he Philippine sock price in he long-run and shor-run as well. The researcher suggesed ha he policy makers should have and srong clear moneary policy in order o conrol he Philippine sock marke price in he long-run and shor-run as well. Ekong and Ebong (2014) explored on he crude oil price, sock marke developmen and economic growh: Evidence from Nigeria for he period from January 1995 o November 2014 employed Vecor Auoregressive (VAR) model and co-inegraion analysis. Their resuls highlighed ha here was long-erm susainable equilibrium relaionship beween sock marke movemen and economic growh and boh affeced by disorion of he price of he crude oil. Ebele (2010) invesigaed on appraisal of he effec of saving on sock marke developmen: Evidence from Nigeria for he period from 2001 and 2010 using muliple linear regression approach. The resuls indicaed ha savings has imporan and posiive consequence on sock developmen in Nigeria. He argued ha policy makers in oil dependen economies should be keen on he effec of he changes of oil prices on heir economy and sock markes and play vial role o influence exchange rae and volumes of marke capializaion hrough he use of oil prices. DOI: / Page

4 III. Maerials and Mehods In his paper, we used ime series secondary daa covering he period of 1993 o 2015 relaed o Mauriius. The variables used in his paper are: growh domesic produc (GDP), marke capializaion raio (MCR), urnover raio and value raded raio (VTR). The daa were colleced from differen sources by World Bank hrough he publicaion of World Developmen Indicaors. GDP was colleced from World Bank naional accoun daa and OECD Naional Accouns daa files and he res variables were colleced from World Federaion of Exchange daabase. In his paper, following procedures was adoped firsly, we es our variables for uni roo es using boh Augmened Dickey-Fuller (ADF) es and Phillips Perron (PP) es. Secondly we deermined opimum lag selecion crierion by using he unresriced VAR model o selec for opimum number of lags. Thirdly, afer deerminaion of opimum lags we run Johansen s co-inegraion es o assess wheher he variables are co-inegraed or no. Fourhly we run resriced VAR model o esimae long - run and shor - run causaliy among variables. Finally, we check for diagnosics es and sabiliy of he model o check he srengh of he model and verify he resuls. All he above procedures in deails are explained in nex par of he paper below. Empirical Model The empirical model can be specified as follows; GDP f (MCR,TR,VTR )...(1) Where he empirical model will be employed as follows GDP 0 1 MCR 2TR 2VTR...(2) Where; GDP = Economic Growh is measured by GDP annual growh rae a ime. MCR = Marke Capializaion Raio is measured by raio of value of lised domesic shares on domesic exchanges as percenage of GDP a ime. TR = Turnover Raio is measured by he value of rades of domesic shares on domesic exchanges o he value of lised domesic shares a ime. VTR = Value Traded Raio measured by value of he rades of domesic shares on domesic exchanges as he percenage of GDP a ime. = Represens he ime from 1993 o 2015 α 0 = Inercep erm ε= Error erm Marke Capializaion Raio is measured by raio of value of lised domesic shares on domesic exchanges as percenage of GDP. We expec Marke capializaion raio o have posiive relaionship o he economic growh. Turnover Raio is measured by he value of rades of domesic shares on domesic exchanges o he value of lised domesic shares. We expec urnover raio o have posiive relaionship wih economic growh. Value Traded Raio measured by value of he rades of domesic shares on domesic exchanges as he percenage of GDP. We expec value raded raio o have posiive relaionship o he economic growh. IV. Resul and Discussion The able 1 shows he disracive saisics he dependen and independen variables of he model. The mean of growh in gross domesic produc (GDP) was approximaely 424% while he sandard deviaion was abou 167%.The GDP growh range from 124% as a minimum and 902% as a maximum. Table 1: Descripive saisics Variables Mean SD Min Max GDP MCR TR VTR The nasy in Marke Capializaion Raio: The mean of growh in marke capializaion raio (MCR) was around 4927% while he sandard deviaion was approximaely 2247%. The MCR growh range varies from 2146% as minimum and 10163% as a maximum respecively. The gross in Turnover Raio: The mean of growh in urnover raio (TR) was abou 564% while he sandard deviaion was approximaely 161%. The TR growh range from 316% as a minimum and 1077% as a maximum as well.the gross in Value Traded Raio: The mean of growh in value raded raio (VTR) was approximaely 265% while sandard deviaion was abou 113%. The VTR growh range varies from 115% as a minimum and 528% as a maximum. DOI: / Page

5 Table 2: ADF Uni Roo Tes AT LEVEL FIRST DIFFERENCE Variable Lag [Order] -sa Prob* Lag[order] -sa Prob* GDP (0) [0] (0) [1] MCR (0) [0] (0) [1] TR (0)[0] (0) [1] VTR (0)[0] (0) [1] Table 2 shows he resuls of Uni Roo using Augmened Dickey-Fuller es, variables of growh domesic produc (GDP) and urnover raio (TR) boh show ha hey are saioneries a level and a firs difference as well while variables of marke capializaion raio (MCR) and value raded raio (VTR) are no saioneries a level and became saioneries afer firs differen. This will pave a way for running he Lag Selecion Crierion. Table 3: Philips - Perron Uni Roo Tes AT LEVEL FIRST DIFFERENCE Variable Lag [Order] -sa Prob* Lag[order] -sa Prob* GDP (0) [0] (0) [1] MCR (0) [0] (0) [1] TR (0)[0] (0) [1] VTR (0)[0] (0) [1] Table 3 indicaes he resuls of Uni Roo using Philips-Perron es. Boh GDP and TR show ha hey are saioneries a level and a firs difference as well while MCR and VTR indicaes ha hey are no saioneries a level and become saioneries afer convering hem in he firs difference. This will overlay for running lag secion crierion. Table 4: Lag selecion crierion Lag LogL LR FPE AIC SC HQ NA * * * * * Besides his sudy uses a small sample of annual daa, selecing more lags would reduce he degree of lack of resricions. Johansen and Juselius (1990) heory advocaes ha for small samples he opimum lags should be limied o 1 or 2 for he well-organized resuls. The opimum lags seleced in his model is 1. This opimum lag will be using in he Johansen Co-inegraion es and Vecor Error Correcion Model (VECM) es as well. Table 5: Johansen Trace Tes for Co-inegraion HypohesizedNo. Eigenvalue TraceSaisic 5% Criical Value Max-EigenSaisic 5% Criical Value of CE(s) None * A mos A mos A mos Trace es indicaes no coinegraion) a he 0.05 level and * denoes rejecion of he hypohesis a he 0.05 level. Source: Prepared by he auhors, based on Eview 8 The resuls for boh he Trace saisic and he Maximum Eigen saisic observed in he able 5 indicaed a maximum rank of one for he scenario seleced a he 5% significance level; he Johansen coinegraion es has acknowledged one co-inegraing vecors or rank, hence one rank is applied o esablish he VECM. Therefore, we conclude ha he variables in his model have one long run co-inegraing associaionship. Table 6: VECM Long run causaliy Coefficien Sd. Error -Saisic Prob CE(1) DOI: / Page

6 According o he resuls in he able 6 of which he opimum lags selecion is 2, and he Johansen s coinegraing es shows 1 co-inegraing vecor indicaed ha here is no long run causaliy running from MCR, TR and VTR oward GDP because probabiliy value is 14.38% which is insignificanand he coefficien is approximaely 30.32% which is posiive, hus Co-inegraing equaion one CE (1) is no significan. Table 7: VECM Shor run causaliy using Wald Tes Variables Tes Saisic Value df Probabiliy MCR Chi-square TR Chi-square VTR Chi-square The able 7shows ha shor run causaliy using Wald Tes observed ha only TR wih probabiliy value of 2.60% shows ha here is shor run causaliy running from TR o GDP while he res variables such as MCR and VTR wih probabiliies of 30.06% and 12.35% respecively concluded ha here is no shor run causaliy running from MCR and VTR o GDP. Table 8: Diagnosic es Obs*R-squared Prob. Serial correlaion: Breusch-Godfrey Serial Correlaion LM Tes Heeroskedasiciy Tes: Breusch-Pagan Godfrey The researcher also checked diagnosic es of he residuals of serial correlaion using Breusch-Godfrey Serial Correlaion LM and Heeroskedasiciy Tes using Breusch-Pagan-Godfrey in he able 8. The resul show ha he probabiliy value of 32.09% indicaed ha residuals are no serially correlaed and probabiliy value of 82.77% concluded ha he residuals are homoscedasiciy as well Figure 1: Tes of normaliy Series: Residuals Sample 4 23 Observaions 20 Mean 1.61e-16 Median Maximum Minimum Sd. Dev Skewness Kurosis Jarque-Bera Probabiliy The figure 1 shows he es of normaliy of he residuals using Jarque-Bera. Since he probabiliy value is approximaely 74.78% which is greaer han 5% implies ha he residuals are normally disribued from his model CUSUM 5% Significance Figure2: Sabiliyes DOI: / Page

7 The figure 2 shows he sabiliy of he model using CUSUM es a 5% significance level.from his figure shows ha he model of he daa are sable because blue line is wihin he red lines which implies ha he model is good. V. Conclusion and recommendaions The purpose of his sudy was empirically invesigaing he impac of sock on economic growh in Mauriius by aking MCR, TR and VTR as dependen variables. The impac of hese variables was empirically esed on economic growh which is GDP as dependen variable for he period of 1993 o 2015-ime series daa using uni roo esing, lag secion crierion, Johansen co-inegraion es and vecor error correcion model (VECM).Under long run, we find ha here is no long run causaliy running from MCR, TR and VTR o economic growh. However, under sho run only TR has shor run causaliy running o GDP, he res variables such as MCR and VTR have no shor run causaliy running o economic growh. The resuls obained in his sudy are similar o Noman (2012) for Bangladesh and Murinde (1997) for India and Pakisan. These resuls would help he policy makers, domesic and foreign invesors in Mauriius sock marke exchange in heir decision making. The governmen of Mauriius should promoe sock marke exchange by for insance propagaing knowledge o he public relaing benefi obained by invesing in sock markes and ensure higher liquidiy on sock markes. Sock marke regulaors should address issues ha are capable of boosing he invesors confidence hrough improving policy formulaion and creaing awareness. When confidence is resored he oal value raded will increase significanly hus raising sock marke capializaion. These incenives would be promoed boh domesic and foreign as well in order o boos up economic growh. Also, he policy makers would avoid inerruping foreign exchange marke in order o conrol excessive volailiy in he sock marke of Mauriius in he shor run. 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