STOCK MARKET DEVELOPMENT AND ECONOMIC GROWTH OF NEPAL

Abstract

This thesis investigates the relationship between stock market development indicators and economic growth in Nepal, focusing on market capitalization, value of traded shares, turnover ratio, and stock return volatility over the fiscal years 2008/09 to 2022/23. Utilizing a combination of Pearson’s Correlation Coefficient, regression analysis, and descriptive statistics, the study analyzes the impact of these indicators on Gross Domestic Product (GDP). The findings reveal a strong positive correlation between GDP and market capitalization (r = 0.915, p < 0.01), indicating that higher economic output is associated with significant growth in the market value of listed companies. Similarly, significant positive correlations are observed between GDP and the value of traded shares (r = 0.784, p < 0.01) and between GDP and turnover ratio (r = 0.842, p < 0.01), highlighting the close relationship between economic growth and market liquidity. However, the correlation between volatility and GDP is weak and near-zero (-0.029), suggesting minimal linear relationship between economic output and market volatility. Regression analysis further confirms the significant impact of market capitalization and value of traded shares on GDP, with standardized coefficients (Beta) of 0.604 and 0.451, respectively. While turnover shows no significant effect on GDP, volatility exhibits a marginally significant negative relationship with GDP (Beta = -0.227, p = 0.068). The model demonstrates a strong fit, with an R-squared value of 0.933, indicating that 93.3% of the variability in GDP is explained by the independent variables. These findings have important implications for policymakers, suggesting that enhancing market capitalization and trading activity could be effective strategies for promoting economic growth. Future research could delve deeper into the mechanisms through which these stock market indicators influence GDP and explore additional factors that might impact the relationship between stock market development and economic growth.