Market Capitalization, Stock Returns, And Economic Growth: Revisiting The Finance–Growth Nexus In Pakistan

The role of stock market development in promoting economic growth remains a central issue in financial economics, particularly in emerging economies where capital markets continue to evolve alongside broader economic reforms. This study investigates the relationship between stock market development and economic growth in Pakistan using annual time-series data spanning 1980–2025. The analysis employs two complementary indicators of stock market development: market capitalization as a percentage of gross domestic product and annual returns of the PSX-100 Index. Economic growth is measured by the annual growth rate of real gross domestic product, while gross fixed capital formation, trade openness, and inflation are incorporated as control variables. To examine both long-run and short-run relationships, the study applies the Autoregressive Distributed Lag (ARDL) bounds testing approach, complemented by the Toda–Yamamoto (1995) causality procedure. Unit root tests indicate a mixed order of integration, validating the use of the ARDL framework. The bounds test confirms the existence of a stable long-run equilibrium relationship among the variables. The empirical findings reveal that market capitalization contributes positively to economic growth, highlighting the importance of market depth and financial resource mobilization. Gross fixed capital formation also promotes growth, whereas inflation exerts a negative influence. Trade openness demonstrates a negative long-run association with economic growth, reflecting structural and external-sector challenges within the economy. The causality analysis identifies a unidirectional causal relationship running from stock market returns to economic growth, while market capitalization affects growth indirectly through its positive impact on capital formation. The findings explain that an expanding and efficient stock market can support economic development by strengthening investment activity and improving resource allocation. The study provides updated evidence on the finance–growth nexus in Pakistan and offers important implications for capital market development, investment promotion, and macroeconomic policy formulation.