An Empirical Study of Pakistan Stock Exchange’s Long-Term Co-Integration with Developed Stock Markets

The study examines how closely the Pakistan Stock Exchange (PSX) is integrated with prominent developed markets such as the US, Australia, Belgium, France, Italy, Japan, Norway, Spain and Austria from 2001 to 2020. Various econometric methods such as unit root tests, Johansen cointegration analysis, Granger causality tests, and Vector Error Correction Models (VECM) and impulse response functions were used to evaluate the extent of interconnections, causal relationships and adjustment processes between these markets. The study demonstrates numerous cointegrating relationships between the PSX and other global markets, signaling partial yet meaningful integration. The Granger causality tests indicate that market trends in developed countries tend to shape those in PSX, while VECM results show that PSX quickly responds to sudden changes in the global financial environment. The results highlight the increasing linkages between PSX and global financial markets and have crucial implications for investment decisions, mitigating risks and efforts to integrate Pakistan’s economy within the international financial system. The study provides new and significant insights using updated evidence and technologically advanced methods.