Stock market development and economic growth: Evidence from India using ARDL and GARCH approaches

Abstract

This study investigates the relationship between stock market development, volatility, and economic activity in India using monthly data spanning January 1997 to December 2023. Unlike earlier studies that rely on low-frequency data, the present analysis adopts a high-frequency framework to better capture short-run dynamics and volatility patterns. Stock market development is measured through market capitalisation and turnover ratio, while volatility is estimated using a GARCH (1,1) model to account for time-varying uncertainty in financial markets. The empirical analysis is conducted using the Autoregressive Distributed Lag (ARDL) approach, which allows for the estimation of both long-run and short-run relationships in the presence of mixed orders of integration. The results reveal a stable long-run relationship between stock market development and economic activity. Market size and liquidity are found to have a positive and significant effect on economic growth, indicating that financial deepening supports investment and improves resource allocation. In contrast, stock market volatility exerts a negative influence, suggesting that financial instability may weaken economic performance. Overall, the findings highlight that while stock market development contributes to growth, its benefits depend on maintaining financial stability in the economy.