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ABSTRACT
Capital market plays vital role in generating long term financial resources and channelizing them into productive investment in any economy. Efficient capital markets are essential for economic growth and prosperity. An integral part of capital market is the stock market, the development of which is linked with the rate of economic growth, level of savings, and the volume of investment. The developing countries are witnessing changes in the composition of capital flows in their economies because of the expansion and integration of the world equity market. The stock markets are also experiencing this change. Foreign direct investments (FDIs) are becoming important source of finance in developing countries including Pakistan. Pakistan's stock market has been classified as one of the fastest growing markets. Karachi Stock Exchange (KSE) is the biggest and most liquid exchange in Pakistan and is a major source of capital formation in Pakistan. Local and foreign investor's confidence in the investment environment of Pakistan has boosted the stock market index in recent years. The paper investigates the impact of FDI on the stock market development of Pakistan. The key interest revolves around the complementary or substituting role of FDI in the stock market development of Pakistan. The study also examines the other major contributing factors towards the development of stock market. An ARDL bound testing approach is used for long-run relationship among variables and the error correction model is used for short run dynamics. Our results support the complementary role of FDI in the stock market development of Pakistan. Other macroeconomic variables affecting stock market development are domestic savings, GNP per capita, and inflation.
JEL Classification: G24, N25, C50.
Key Words: Stock Market development, Foreign Direct Investment.
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1. INTRODUCTION
It is generally recognized that a strong financial system guarantees the economic growth and stability. Stock market is an integral part of the financial system of the economy. It is a source of financing a new venture based on its expected profitability. The stock market is replica of the economic strength of any country. To boost investment, savings and economic growth, the development of stock market is imperative and cannot be ignored in any economy. Theoretical work shows the positive effect of stock market development on economic...