Impact of Market Capitalization, Market Size, Liquidity and Investment in Economic Performance of Pakistan

Abstract

Stock markets perform a very crucial role in channelizing funds, improving resource allocation, and contributing to economic growth and development. This research analyzes the effect of investment, liquidity, market capitalization, and market size on Pakistan economic growth. The principal objective of this research is to explain how investment, liquidity, market capitalization, and market size can influence Pakistan’s economic growth by utilizing time series data from 1995 to 2024. The study applies the ARDL framework to explore the long-term relationship among variables as well as their interaction in short term. We also perform various diagnostic tests such as (unit root, multi-collinearity, heteroscedasticity, normality, auto-correlation and specification bias) to evaluate the accuracy of the model. The outcomes of this research reveal that market capitalization, market size, and liquidity have direct and significant relationship with growth of Pakistan economy, however investment has an inverse association with Pakistan’s economic growth due to the financial crowding out effect. The study provides significant policy recommendations on the role of stock market in economic performance of the country.