Factors Influencing Foreign Portfolio Investment in the Pakistan Stock Exchange: An Empirical Analysis

Abstract

Foreign portfolio investment (FPI) is an important factor to consider in terms of the growth and stability of the emerging financial markets such as in Pakistan. FPI inflows have effects on stock market liquidity, asset pricing as well as economic growth in general. In the current paper, the authors explore the drivers of FPI in the Pakistan Stock Exchange (PSX) by examining the economic, financial, and institutional drivers in the past ten years. Such important variables that are taken into account are market capitalization, liquidity, inflation, exchange rate volatility, interest rates, and political stability. The current research utilizes multiple regression analysis to compute the effect of these variables on FPI inflows using secondary data of PSX, State Bank of Pakistan (SBP), and World Bank databases. Findings reveal that the liquidity of the market, a stable exchange rate, and good macroeconomic performance are the main things that appeal to any foreign portfolio investor whereas political instabilities and high inflation tend to discourage investments. This empirical study gives actionable information to policy makers and market participants to enhance the state of investment and generate sustainable capital inflows in Pakistan.