Mohd Tasnim Chowdhury201106417Investment ProjectSpring 2014Instructor: Dr. Ritab al khouriThe Effect of Stock Market Development and Growth on the Real EconomyIntroductionMost developing countries have fewer restrictions on domestic stocks and local investments abroad. A higher level of education in the country clearly demonstrates that such stock market liberalizations promote economic growth. The performance of the stock market during the recent financial crisis and the subsequent decline in output experienced by numerous emerging market economies have raised a new concern about the linkages between financial and real variables. In the case of the United States and some other advanced countries, the empirical relationship between real economic activity and lagged real stock returns has been studied extensively. Apparently, this connection remains surprisingly unknown in the situation of emerging market economies. Furthermore, although numerous theories have been predicted to explain the empirical relationship between countries, diversity in its strength has not been used to differentiate along with existing theories. Stock Returns and Growth in Advanced Economies To begin, we need to take a hard look at the correlation between real stock returns and economic growth in a group of emerging market and highly developed economies. In the United States, the correlation between real economic activity and lagged real stock returns is optimistic and statistically and economically important. Countries like Canada, Japan, Germany and the United Kingdom and many other European countries have a similar relationship. While correlation is important and stock returns provide important information… half of the paper…segment of GDP in a model of 13 OECD countries. In summary, previous empirical research has suggested a relationship between stock market growth and economic development, but it is far from perfect. Even if the proposed connection is causal, most empirical studies have addressed causation indirectly, if at all. Furthermore, the majority studies have not sufficiently addressed information that efficient markets should factor predictable future growth into current-period prices. Reference Gupta, N., & Yaun, K. On growth stock market liberalizations. July 2008Code, R. A., Moshirian, F., & Wu, Q. Bank stock returns and economic growth. September 2007Mauro, P. Stock returns and output growth in emerging and advanced economies. May 2002Naceur, SB, & Ghazouani, S. Stock markets, banks, and economic growth. June 2006