The Role of Stock Markets in Economic Growth: Empirical Evidence From Panel Data Analysis

ABSTRACT Stock market development is widely viewed as an important component of economic performance, influencing how economies mobilise capital, allocate resources, and support long‐term growth. This study explores the link between stock market development and economic growth using a quarterly panel of 36 countries from 2003 to 2022. Employing panel cointegration tests, fully modified OLS, and a panel vector error correction framework, we analyse both the long‐run and short‐run dynamics of this relationship. The long‐run association between stock market capitalisation and economic growth is positive and significant, and the magnitude of this effect is substantially larger in high‐income economies. Short‐run causality is bidirectional in high‐income countries but flows only from stock market development to growth in low‐ and middle‐income countries. A threshold panel VECM, which uses financial development level to endogenously identify regimes based on financial maturity, shows that the adjustment process is non‐linear and depends on countries' level of financial development. The findings suggest that financially less developed economies may benefit from strengthening market institutions, improving liquidity, and enhancing regulatory quality to better harness the growth contributions of stock markets.