This paper attempts to explore a seasonal pattern, the Ramadhan effect, in the Pakistani equity market. Ramadhan, the holy month of fasting, is expected to affect the behaviour of stock market in Pakistan where the environment in Ramadhan is different from other months as people devote more time to perform religious rituals and the general economic activity slows down. The effects of Ramadhan on mean return and stock returns volatility are examined by including a dummy variable in regressions and GARCH models respectively. The analysis indicates a significant decline in stock returns volatility in this month although the mean return indicates no significant change.

This paper re-examines the causal relationship between stock prices and macro variables like consumption expenditure, investment spending, and economic activity (measured by GDP) in Pakistan. Using annual data from 1959-60 to 1998-99 and applying cointegration and error correction analysis, the paper indicates the presence of long-run relationship between stock prices and macro variables. Regarding the cause and effect relationship, the analysis indicates a one-way causation from macro variables to stock prices, implying that in Pakistan fluctuations in macro variables cause changes in stock prices. The findings suggest that the stock market in Pakistan is not that developed to play its due role in influencing aggregate demand. A disturbing feature of the stock market in Pakistan is that it cannot be characterised as the leading indicator of economic activity. In the absence of other strong indicators, shooting up of stock prices may indicate a speculative bubble.

This paper empirically examines the effect of foreign capital inflows on domestic price levels, monetary expansion, and the exchange rate volatility for Pakistan using linear and nonlinear causality tests. The key message emerging from the analysis is that there is a significant inflationary impact of capital inflows, in particular during the period of surges in capital inflows. Specifically, we find evidence of a significant nonlinear Granger causality running from capital inflows to the change in domestic prices. We also show that domestic prices are nonlinearly caused (in Granger sense) by the growth of domestic debt and money supply-to-GDP ratio. Our results, however, suggest that the market interest rate and the nominal exchange rate do not have significant relationships with domestic prices. The findings suggest that there is a need to manage the capital inflows in such a way that they should neither create an inflationary pressure in the economy nor fuel the exchange rate volatility. JEL Classification: C22, C32, F21, F31, F32 Keywords: Capital Inflows, Inflationary Pressures, the Exchange Rate Volatility, Monetary Expansion, Nonlinear Dynamics

The effect of changes in money supply on stock returns has been a matter of controversy among economists for many decades. Those in favour of presence of links between money market and stock market argue that any change in money supply creates a wealth effect which disturbs the existing equilibrium in the portfolio of investors. When they re-adjust their asset portfolio, a new equilibrium is established in which the price level of various assets is changed. On the other hand, if the stock market is efficient, it would already have incorporated all the current and anticipated changes in money supply. Consequently, a causal relationship between changes in money supply and stock prices will not be established. Moreover if the change in money supply coincides with a corresponding change in the velocity of money, it will not have any effect on stock prices. The pioneering work in this regard was done by Sprinkel (1964). Using the data from 1918 to 1960, he found a strong relationship between stock prices and money supply in the United States. His conclusions, however, were mostly based upon graphical analysis.

This paper investigates the integration of the equity market in Pakistan with those in other countries. In this context, seven major equity markets, that is, the markets of USA, UK, France, Germany, Japan, Hong Kong, and Singapore were selected for the analysis. The integration was examined through co-integration analysis using weekly country indices from January 1988 to December 1993. The analysis provides little evidence of integration of the Pakistani market with international markets. The low level of integration quali®es the Pakistani market as an attractive diversi®cation tool for international portfolio managers.