Available online at www.behaviorsciences.com Reef Resources Assessment and Management Technical Paper ISSN: 1607-7393 RRAMT 2014- Vol. 40, 2014, 1 The Effects of Stock Market and Banking Sector Developments on Economic Growth in Iran: Evidence from Univariate Framework Analysis Abbas Alavi Rad* *a , Fatemeh Etemadmoghaddam b a Department of Economics, Abarkouh Branch, Islamic Azad University, Abarkouh, Iran b Department of Economic, Science and Research Branch, Islamic Azad Univercity, Yazd, Iran Abstract The main objective of this study is to examine the long-run and short-run effects of stock market development and banking sector development on economic growth in Iran. The Autoregressive Distributed Lag (ARDL) bounds testing approach to cointegration was applied to examine long-run relationship among the series, while short-run relationship was tested by Error Correction Model (ECM). Utilizing quarterly data from 1995-2010, the findings of this study reveals that stock market development is an important ingredient of growth in the long-run, but with a relative lower magnitude as compared to the other determinants of growth, particularly with banking sector development. On the other hand, stock market development has a significant effect on economi c growth in short-run, but the short-run coefficient of stock market development is lower than the long-run coefficient. © 2014 Published by RRAMT France Ltd. Keywords: Stock Market Development, Banking Sector Development, Economic Growth, ARDL, ECM 1. Introduction Among the determinants of economic growth, stock market development is increasingly becoming an important factor to impact upon it. Stock market contributes to the mobilization of domestic savings by enhancing the set of financial instruments available to savers to diversify their portfolios providing an important source of investment capital at relatively low cost (Athanasios and Antonios, 2012). A well-functioning and liquid stock market, that allows investors to diversify away unsystematic risk, will increase the marginal productivity of capital (Pagano, 1993). In addition, Obstfeld (1994) shows that international risk sharing through internationally integrated stock markets improves the allocation of resources and accelerates the process of economic growth. But, the economic role of the stock markets in relatively less developed Asian countries is less clear. Particularly, the studies on relationships among stock market development and economic growth in Iran are relatively scarce compared to the developed economies. * Corresponding author name.