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Macroeconomic Determinants of Stock Market Capitalization in Pakistan:Fresh Evidence from Cointegration with unknown Structural breaks

Shahbaz, Muhammad and Ur Rehman, Ijaz and Zainudin, Rozaimah (2013): Macroeconomic Determinants of Stock Market Capitalization in Pakistan:Fresh Evidence from Cointegration with unknown Structural breaks.

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Abstract

This paper explores the macroeconomic determinants of stock market development in case of Pakistan over the period of 1974-2010. We have applied Zivot-Andrews unit root test for integrating properties of the variables and the ARDL bounds testing for cointegration. The direction of causality between the variables is investigated by applying the VECM Granger causality approach. Our results revealed that variables are cointegrated for long run relationship. Economic growth, inflation, financial development and investment increase stock market development but trade openness decline it. The causality analysis confirms that stock market development is a Granger cause of economic growth, inflation, financial development, investment and trade openness. This paper indicates the importance of trade openness while formulating a comprehensive financial policy.

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