A Note on Relationship between Economic Activity and Stock Market Development: a Case of Euro Area Countries

Abstract

The aim of the paper is to empirically examine if the causal relationship between economic activity and stock market development exists in the selected 11 EA countries. The existence of relationship is investigated with the use of cointegration, vector error correction model and Granger causality during three sub‑periods between January 1993 and January 2017. The results show that the general conclusion on the relation between activity and stock market development cannot be stated and that country‑specific development should be taken into account when making decisions either from the investors’ or policy makers’ perspective. It also seems that the level of integration plays important role when studying the nature of relationship between variables during different time periods.

Keywords

• economic activity
• causality
• cointegration
• stock market development