This paper uses the Vector Autoregressive (VAR) model to investigate the impact of a stock market crash shock on the real economy in Tunisia. Analysis reveals that the real investment growth rate negatively reacted to a stock market crash shock of 2003. The impact of stock market crash shock helps explain the fluctuations of the real investment growth rate. It also explains a small proportion of the variability in real industrial production growth rate, real Gross Domestic Product (GDP) growth rate and real private consumption growth rate.

Theoretical and empirical studies have been done to explain the impact of stock market crashes as well as the financial crises on the real economy such as industrial production1, consumption2, and investment.3 These results suggest that financial development contributes to the output level of the economy in both the short run and the long run.The purpose of this paper is to analyze the effect of a stock market crash shock on the real economy through the Vector Autoregressive (VAR) model. Moreover, we decompose the forecast error variance to show the proportion of the movements in one variable due to its own shocks versus shocks from the stock market crash. The contribution of this paper is twofold. First, it focuses on VAR to examine the impact of a stock market crash shock on the real economy in Tunisia. This study, to our knowledge, is the first to be undertaken in Tunisia and is different from others. Second, our findings seem to be useful for central bank to take appropriate actions in order to prevent stock market crashes and to reduce their effects.

Applied Finance Journal, Tunisian Stock Market, Booms, Busts, Stock Market, Crash, Shock, Real Economy, Empirical Investigation, Vector Autoregressive Model, Vector Autoregressive (VAR), .