Financial market integration in Pakistan

Abstract

This research evaluates the issue of financial integration with reference to financial market of Pakistan; subsequent to liberalization (1991) capital flows rapidly growing due to openness reforms. This openness reforms specifically increased capital flow in short run in domestic market. It is imperative to explore causes pertaining to this issue to obtain positive impact with growing sustainable financial markets. For this purpose, monthly data of Karachi interbank offer rate (KIBOR), 3 months treasury bills rate, Pakistani rupee/US dollar exchange rate, stock prices (Karachi Stock Exchange 100 index) and the London Interbank offer rate (LIBOR) were used. Applying Johnson co integration technique, it is found that there is a long run correlation among local foreign exchange market and LIBOR but this relationship is not robust due to high control of State Bank of Pakistan (SBP). Securities market is still found at the developing stage and not fully integrated with international financial market. It is suggested that further steps and initiatives be taken to increase international financial integration in securities market. This may be very helpful to reduce arbitrage and speculation in financial market in Pakistan. Key words: Financial integration, co-integration, market.