This paper examines the empirical relationship between stock market development and economic growth in Nepal over the period of 22 years from 1993 to 2014. The long-run and short-run elasticities were estimated by the use of autoregressive distributed lag (ARDL) bounds testing approach for co-integration analysis. The economic growth has been measured by real GDP per capita, and stock market development has been measured by market capitalization of Nepal stock exchange (NEPSE). The relationship has also been controlled by gross capital formation as percentage of GDP and the inflation. Estimates of ARDL approach to cointegration indicate that economic growth, market capitalization, gross capital formation and inflation shared a stable long-run relationship in Nepal. The magnitudes of the ECT coefficients suggest that the speed of adjustment in estimated model is reasonably good. Findings indicate that market capitalization has a significant positive impact on the economic growth in both long as well as in short run. However, results show that inflation has negative and significant impact on GDP per capita in long as well as in short run. Further, the study indicates that there is unidirectional causality and that runs from stock market development to economic growth in Nepal. Therefore, this study concludes that long run policies should be formulated in such a way that they facilitate the development of stock market so as to increase the economic growth.

stock market development, economic growth, ARDL bounds test, cointegration, causality