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Corresponding Author:
Abdulnasser Hatemi-J, Department of Accounting and Finance, College of Business and Economics, UAE University, Al Ain, The United Arab Emirates

The Causal Impact of Stock Market Development on Economic Development in the UAE: An Asymmetric Approach

Volume 72 - Issue 2, May 2019
(pp. 171-184)
JEL classification: C32, E44, G19
Keywords: Stock Market, Economic Development, Asymmetry, the UAE, Causality

Abstract

This paper investigates the causal impact of the financial sector on the real or economic sector of the UAE. The underlying data is transformed into partial cumulative sums for positive and negative changes in order to conduct asymmetric causality tests. Allowing for asymmetry is consistent with reality since individuals in financial markets have the tendency to respond more powerfully to a negative news than to a positive one. We also capture the propagation mechanism of a shock in each variable by estimating the generalized impulse response functions, which are not sensitive to the way the variables are ordered in the model. The results reveal that the financial sector has indeed a causal impact on the real sector of the economy. However, the reverse causal impact is not found. These underlying causality results are also confirmed by the generalized impulse response functions.


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