Impact of Financial Reforms on Stock Price Index of Karachi Stock Exchange: An ARDL Cointegration Approach

This paper studies the dynamic behavior of stock price index of Karachi Stock Exchange (KSE). We use annual data from 1973-2008 to capture the long run and short run relationships of stock prices with various macroeconomic variables such as real interest rate, investment, money supply and exchange rate. The Bounds Test approach to cointegration in the framework of Autoregressive Distributed Lagged Model (ARDL) is applied. Index for financial liberalization is developed using dating convention to examine the long run and short run impact of financial reforms on KSE share price index. The results clearly indicate that financial reforms have a positive and significant impact on stock price index in the long run. On the contrary, in the short run a negative but statistically insignificant relationship exists. This may be attributed to the slow process of easing out of financial constraints. Future research should focus on using high frequency data to ascertain why financial reforms do not affect stock price index in the short run.