THE IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH: EMPIRICAL EVIDENCE

The development of the nonoil sector in Azerbaijan has always been one of the main goals of the Azerbaijani government. The oil sector of the economy was well developed when Azerbaijan became independent, but to use the oil source more effectively, the country was determined to diversify funds into the nonoil sector of the economy, which enhanced most industries of the economy and led to an increase in foreign direct investment. However, another source of foreign direct investment and investor attraction - stock markets was not developed and organized properly until 1998, mainly due to outdated procedures left from USSR rule and an absence of principles, methodologies and understanding for determining how the stock market can play a major role in the expansion of the economy and the attraction of foreign investment. Currently, Azerbaijan has numerous opportunities to broaden its stock market; enable easy means of increasing the number of small businesses and startups and create opportunities for such firms to access the global economy and rapidly expand. This research analyses the potential relationship between stock market development and economic growth to predict the possibility of a positive impact of the stock market on Azerbaijan's economic growth, overall socioeconomic welfare and business environment. For the purposes of the present research, statistical figures of the Azerbaijan's main economic indexes were collected, including gross domestic product value, foreign direct investment value, stock market liquidity and turnover values, which were then analyzed and tested at various levels of cointegration testing, Granger causality testing, vector error correction modeling, etc. All analyses were performed using Stata 11 statistical software based on 1998-2016 data. The outcome of Johansen-Julius testing shows the existence of cointegration, a VECM test proves a relationship between the stock market and economic growth in the long run, and a Wald test confirms the correction of this growth in the short term by given explanatory variables. Hence, a Granger causality test is conducted and determines the bidirectional relationship between 3 variables: foreign direct investment, GDP and LIQ (stock market liquidity). From the results of the analysis, the study concludes that the expansion of the stock market and an increase in foreign direct investment will have a chain effect that leads to economic growth and improvements in social welfare in Azerbaijan.