THE CAUSAL RELATIONSHIP BETWEEN THE STOCK EXCHANGE, ECONOMIC DEVELOPMENT, CREDIT, AND THE U.S. DOLLAR INDEX: AN EMPIRICAL EVIDENCE FROM PALESTINE

Abstract

This study aims to investigate the causal relationship between the stock exchange, economic development, the credit market, and the U.S.dollar index in Palestine. In order to investigate this relationship the researcher used the Granger causality test to find causal relationships based on time series data for the period from 1997 to 2013. The analysis reveals that the causal relationship is rejected at a 5% level among the growth of GDP and the stock exchange capitalization, and furthermore that the US dollar index does not Granger-cause stock exchange capitalization, but there is a weak causal relationship between credit facilities for the private sector and stock exchange capitalization. Additionally, there is a weak Granger-cause between the US dollar index and credit facilities to the private sector and this is because the Palestine economy isa small and illiquid financial market. In addition, small markets do not necessarily function effectively.