Estimating the Stock Market as a Barometer of the Transition Economy: Evidence from Pakistan

Abstract

In 2004-2005, the Pakistani stock market has shown an unprecedented rise of 65% and a sharp decline of 32.7% in a week's time, which resulted in a loss of more than Rs.750 billion. The government and the critics have differently claimed the rise and fall of the stock market; according to the government officials, the rise is because of their effective economic management, and the critics claim it is organized corruption. The objective of this research is to check the truthfulness of the Karachi Stock Exchange (KSE) and verify its role as a "barometer of the economy." The results obtained through established and validated models suggested that the Karachi Stock Exchange (KSE) is informationally inefficient, supporting the critics' views regarding foul play by large investors in favor of government officials; therefore, the conclusion that "KSE is not a true barometer of the Pakistani economy" is reached despite the presence of regulatory measures and bodies such as the Securities and Exchange Commission of Pakistan, the Ministry of Finance, and the State Bank of Pakistan.