The causal relationship between the growth rate of stock returns and the growth rate of GDP: A quantitative case study of Iraq

Abstract

The causal relationship between stock returns and GDP is one of the most debated topics in the relevant scientific community. This is due to the divergent opinions of thinkers regarding the possibility and feasibility of linking these two variables, or the ability of the first variable, stock returns, to predict the future trajectory of the second variable, GDP. This is because stock returns are subject to continuous, and sometimes sharp, fluctuations, and may even reach low levels that do not justify investment in stocks offering such returns. Based on the alleged predictive ability of stock markets to predict future GDP, the central problem of this research is that the fluctuations in stock prices, from time to time, may provide an unreliable indicator of the future direction of real economic activity. This research aims to achieve several objectives, including clarifying the nature of the short-term and long-term relationship between stock returns and GDP growth in Iraq, as a case study. The research concluded that stock returns, as an independent variable, cause GDP growth, as a dependent variable, in Iraq, at least during the research period. This is supported by the F-statistic, tested according to the Granger causality test, which showed that its calculated value was higher than its critical value. Therefore, we reject the null hypothesis, which states that stock returns do not cause GDP growth, and accept the alternative hypothesis, which states the opposite.