International Journal of Business and Social Science

ISSN 2219-1933 (Print), 2219-6021 (Online) DOI: 10.30845/ijbss


Financial Liberalization and Stock Market Behaviour in an Emerging Market – A Case Study of Pakistan

This paper examines the relationship between share prices index and financial liberalization and a set of seven macroeconomic variables in Pakistan for the period 1971-2005 using quarterly time series data. The study uses more comprehensive and recent technique, Bounds test approach to determine the short run and long run linkages between KSE Index and financial liberalization. Findings of the study indicate that GDP is the largest positive determinant of Pakistani stock market in both short run and long run, while inflation is the largest negative determinant in long run. Empirical results also indicate that size of the financial market has positive impact on KSE Index in both long run and short run. Financial liberalization and reforms started in early 1990s, as part of economic reforms has a very strong net effect on the stock market. It means that stock market is too much sensitive and volatile to financial liberalization in emerging economies.

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