Is Stock Market Sensitive to Foreign Capital Inflows and Economic Growth? Evidence from Pakistan

Raza, Syed Ali and Jawaid, Syed Tehseen and Afshan, Sahar (2013): Is Stock Market Sensitive to Foreign Capital Inflows and Economic Growth? Evidence from Pakistan.

Abstract

This study investigates the impact of foreign capital inflows and economic growth on stock market capitalization in Pakistan by using the annual time series data from the period of 1976 to 2011. The ARDL bound testing cointegration approach confirms the valid long run relationship between considered variables. Results indicate that foreign direct investment, workers’ remittances and economic growth have significant positive relationship with the stock market capitalization in long run as well as in short run. Results of dynamic ordinary least square (DOLS) and fully modified ordinary least square (FMOLS) suggest that the initial results of long run coefficients are robust. Results of variance decomposition test show the bidirectional causal relationship of foreign direct investment and economic growth with stock market capitalization. However, unidirectional causal relationship is found in between workers’ remittances and stock market capitalization. It is suggested that in Pakistan, investor can make their investment decisions through keep an eye on the direction of the considered foreign capital inflows and economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: Remittances, Foreign Direct Investment, Economic Growth, Market Capitalization
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F24 - Remittances; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F43 - Economic Growth of Open Economies; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General

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