Empirical Analysis of Factors Affecting Integration of Pakistani Equity Markets

The purpose of this study is to analyze the factors which determine the interconnection of the Pakistani equity market with the foreign equity markets. We nominated the equity markets of the top trading countries of Pakistan which include China, Germany, Indonesia, UAE, and the USA. The study period for this analysis covers the period from 2005 to 2018, including the time of the global financial crisis (GFC) in 2008. We investigated the level of correlation between Pakistan and its trading countries by applying the DCC-GARCH model using MSCI daily stock return data. Moreover, we employed the OLS regression model and the fixed effects model to determine the effect of the determinant factors on the level of connectedness among the selected equity markets. The results showed that the interest rate differential, inflation rate differential and trade intensity, between the selected pairs of equity markets of Pakistan with foreign equity markets have a significant effect on the correlation between them. In addition, the GFC also shows a significant impact on the equity market correlation for the equity market pairs chosen. However, the results vary in different combinations of the Pakistani equity market with other equity markets, selected based on the trade relationship.