Factor Affecting Performance of Stock Market

Topics: Investment, Stock market, Stock exchange Pages: 66 (13585 words) Published: June 11, 2013
Abstract
This study examines the effects of foreign direct investment, market capitalization and adjusted on stock market using time series data from 1991 to 2011. A result shows that there is a significant relationship between foreign direct investment and stock market, as well as there is also a significant relationship between adjusted saving and stock market but there is insignificant relationship between market capitalization and stock market. Foreign direct investment, Market capitalization and Adjusted saving explains 90% of variation in the stock market. It is recommended that the government can encourage FDI in Pakistan to increase its savings by taking various steps provide incentives and save foreign investors interest in a volatile political environment that prevailing in the country. Key Words: Stock market, Foreign Direct Investment, Market Capitalization and Adjusted Saving.

1. Introduction:

A very important and integral part of a country’s financial system is the stock market and a strong financial system guarantees the financial development and growth of that country. A well organized and managed stock market encourage investment by identifying and supporting that productive projects that will ultimately lead to economic development .The stock markets are the best indicators to estimate future economic activity and stock market health is also a measure of economic strength of a country. In order to boost economic development of a country the development of stock market is vital.

The Pakistan is a country situated at an intersection of three major counties of Asia. It is a developing, lower middle-income country with GDP per capita $2500, and have a population of 187 million. The Karachi stock exchange (KSE) is the oldest stock exchange of Pakistan established in 1947. It was declared the “Best Performing Stock Market of the World for the year 2002. The other stock exchanges of the country include Lahore stock exchange (LSE) and Islamabad stock exchange (ISE) established in 1974 and 1997 respectively. Foreign buying interest had been very active on the KSE in 2006 and continued in 2007. According to estimates from the State Bank of Pakistan, foreign investment in capital markets total about US$523 Million. A major source of investment inflow for a developing country is foreign direct investment. FDI provides a passage for technology, managerial skills, and human capital to come into the host country. Foreign Direct Investment (FDI) inflow is a key factor in influencing the economy of the country. Pakistan’s foreign direct investment (FDI) dropped by 44.7% in the first ten months of fiscal year 2009-2010, compared with a year earlier, according to an official document of the Board of Investment (BOI), a division responsible for promoting investment in Pakistan. “The State Bank of Pakistan (SBP) has released FDI for July-April (2009-2010) indicating $1.772 billion against $3.20 billion for the corresponding period of the last fiscal year”, the document says. The document indicates that Pakistan secured $3.52 billion in FDI in 2005-2006. FDI grew to $5.14 billion in 2006-2007, then $5.41 billion in 2007-2008. However, with the decline in economic growth and the prevalence of terrorism, its FDI level dropped to $3.72 billion in 2008-2009. As terror attacks intensified, investment continued to shrink, dropping to $1.72 billion in 2009-2010. The United States was the top investor with $490m. It was followed by The Netherlands, $269.2m; Britain, $214m; UAE, $182m; Switzerland, $126m; Singapore, $93.5m; Cayman Islands, $69.2m; and others, $328m. The oil and gas sector attracted the most investment, $604.7m. Other industries receiving significant foreign support include telecommunications, $309.8m; finance, $133m; transportation, $104.2m; paper and pulp, $80.5m; construction, $86.3m; chemicals, $79.1m; and others, $375m.

Previously, researches have been done analyzing the impact of FDI on Stock...

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