The dynamic impact of foreign portfolio investment on stock prices in Pakistan

Abstract

The objective of this paper is to examine the short-run and long-run dynamic relationship between foreign portfolio investments (FPI) and stock prices of Pakistan. This study first ever attempts in the context of Pakistan economy to investigate the foreign portfolio investment and its impact on the domestic stock market. The surge in FPI in the developing countries is relatively due to growth of stock markets in these countries, liberalisation of their economies, high returns on investment, trade openness, improved communication and global technology. This study used annual time series data starting from 1984 to 2016. The autoregressive distributed lag (ARDL) method used for both the long-run and short-run relationship between FPI and various policy variables. All the results are statistically significant except the exchange rate and the model is best fitted which shows the diagnostic and stability test.