The Stock Market and Pakistan Economy - 1964-87

This paper attempts to analyse and measure the link between stock market and ag gregate economic activity in Pakistan through two components of aggregate demand i.e. consumption expenditure and investment during 1964 1987. The results provide evidence of wealth effect from stock prices changes to consumption expenditure. The relationship between investment and stock market supports the neo-classical model of cost of capital, which suggests that Pakistani firms first determine the stock of real capital they desire and then determine the rate of investment. The causality relation ship between stock prices and industrial production (proxy for real economic activity) using monthly data establishes a feedback relationship which suggests that stock mar ket in Pakistan appears to be informationally efficient with respect to real economic ac tivity.