Applying the vector error correction model (VECM) to analyze the relationship between economic growth and stock market development in Vietnam

Abstract

The paper researchs the cause-effect relationship between economic growth and stock market development in Vietnam by using vector error correction model (VECM). The results prove that there is a long-term relationship between Vietnamese economic growth and its stock market. Besides, the Granger causality test illustrates that there exists a unidirectional relationship which Vietnamese stock maket development will cause Granger - causality to the economic growth. Thanks to its market capitalization size, Vietnamese stock market performs its role in funding for the economy. But there is not enough evidence to conclude that the stock market’s liquidity and turnover ratio can cause Granger causality to its economic growth. The other findings show that there is only a small contribution ratio of the stock market to the economic growth by using variance decomposition of GDP. Finally, the paper also suggests some policies for Vietnamese Government in improving the stock market’s liquidity and turnover ratio to contribute to the economy in the future.