Stock Market-Growth Nexus in Nepal

Abstract

This study examines the long-run and short-run relationships between stock market development and economic growth in Nepal over 1994–2025 using annual time-series data and the autoregressive distributed lag (ARDL) bounds testing approach. The bounds test establishes cointegration among the variables (F = 6.8769). In the long run, inflation is significantly and negatively associated with real gross domestic product (RGDP), whereas the number of listed companies is significantly and positively associated with RGDP; the NEPSE Index, real market capitalization, and real paid-up capital are not statistically significant. In the short-run error correction model, changes in the NEPSE Index and inflation are negatively associated with RGDP growth, while changes in the number of listed companies and real paid-up capital are positively associated with RGDP growth. The error correction coefficient is -0.2788  (p<.001), indicating that approximately 27.9% of disequilibrium is corrected within one year. Overall, the findings indicate that market breadth and macroeconomic stability are more closely associated with Nepal’s economic growth than stock-price performance or market capitalization alone. Policies that broaden productive listings, strengthen the use of equity capital for productive investment, and maintain price stability may therefore improve the contribution of Nepal’s capital market to economic growth.