Stock Market Capitalization and its Macroeconomic Determinants: An Empirical Investigation from Emerging Economy

Abstract

The stock market's significance has extended beyond the domestic borders since it is playing a crucial role in attracting foreign direct investment by providing a transparent and regulated platform for investment. Foreign investors are attracting from countries with robust and well-regulated stock markets, contributing to economic growth, job creation, and technology transfer. We estimated the long-run & short-run effect of economic forces on capital market of Pakistan during 1980-2019. Results show that the development in the banking sector and gross domestic product positively while inflation, trade openness and foreign direct investment negatively influence the development of capital market. While in short-term only gross domestic product, inflation, and foreign direct investment is found to be significant. The negative value of error correction term indicates that if the variables vary from the level of equilibrium by 1% in the short term, they will return to equilibrium at a rate of 74.3% each year. The study has significant practical implications for the policy makers and government officials regarding the development of stock market.