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http://dx.doi.org/10.13106/jafeb.2021.vol8.no6.0543

Foreign Capital Inflows and Stock Market Development in Pakistan  

SAJID, Ali (College of Management Sciences, Karachi Institute of Economics & Technology)
HASHMI, Muhammad Arsalan (College of Management Sciences, Karachi Institute of Economics & Technology)
ABDULLAH, A. (College of Management Sciences, Karachi Institute of Economics & Technology)
HASAN, Muhammad Amin (College of Management Sciences, Karachi Institute of Economics & Technology)
Publication Information
The Journal of Asian Finance, Economics and Business / v.8, no.6, 2021 , pp. 543-552 More about this Journal
Abstract
The study examines how foreign capital inflows affect stock market development in Pakistan for the period from July 2008 to June 2018. Several components of foreign capital inflows were used for empirical analysis, namely, foreign direct investment, foreign portfolio investment, and remittances. Further, market capitalization was used as a proxy for stock market development. The study uses an ARDL model for examining the long-run and short-run relationships between variables. We also analyze the bi-directional causality between the variables through the Granger causality test. Further, the presence of structural breaks was analyzed through the CUSUM and CUSUM Square test. The results suggest that in the long run, remittances have a positive and significant relationship with stock market development. However, foreign direct investment, foreign portfolio investment, and USD-PKR exchange rate do not have a significant impact on stock market development. The results also suggest that in the short run there is a negative relationship between FDI, USD-PKR exchange rate and market capitalization. Contrarily, we found a positive relationship between FPI and market capitalization. The results of Granger causality test suggest that remittances and USD-PKR exchange rate have a causal relationship with stock market development. Finally, we found no evidence of structural breaks in the dataset.
Keywords
Stock Market Development; Market Capitalization; Foreign Capital Inflow; Foreign Direct Investment; Remittances;
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