DOES FOREIGN PORTFOLIO INVESTMENT AFFECT STOCK MARKET PERFORMANCE? A CASE OF PAKISTAN

Abstract

This paper was researched with the purpose of determining the effect of
foreign portfolio investments on stock market’s performance in Pakistan, and to
carry out this study, time series data for the years 1984-2015, calculated
annually, was considered, while market capitalization was taken into
consideration for valuating stock market performance. Stock market
capitalization and FPI are the focus variables, while FDI, exchange rates, interest
rates and polity index score have been used as control variables. Multiple
econometrics techniques were employed to examine the relationship amongst
the variables. The stationary analysis for this study was performed through
Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) unit root tests, while the
co-integration analysis for confirmation of long run relationship was carried out
through Johansen. To gauge the nature of relationship between variables,
ordinary root square method of regression analysis was then applied, and to
determine the short run relationship, we utilized the error correction model. The
employment of granger casualty test was used in testing the causal relationship’s
existence between our variables. Furthermore, for estimating long run
coefficients, a rolling window analysis was applied through the sample period.
The findings of this research indicate a positive impact of FPI on stock market
capitalization. Long run and short run relationships were also evident. Statistical
findings also indicated a significantly positive impact of FPI on stock market
capitalization in Pakistan with a bidirectional causal relationship. Further, the
estimation indicated that the FPI has positive long-run coefficients through the
sample period. The findings imply that it would be prudent on part of policy
makers to devise such policies which attract foreign investments in Pakistan’s
stock market. The stability of political, economic and law and order situation
would encourage the foreign investment. Reduction of restrictive laws and
introduction of incentives would encourage the potential actors to invest their
capital in Pakistan stock market. With this study, our purpose has been to contribute to already existent literature on the subject with a focus on Pakistan’s context, in research areas that are lacking.