Role of Foreign Private Investment and Remittance in Stock Market Development: Study of South Asia

Abstract

This paper is an effort to study the role of foreign private investment and foreign remittance in the stock market development of three major South Asian Countries i.e. Pakistan, India and Bangladesh. Secondary data maintained by World Bank of 24 years from 1988-2011, are analyzed using E-view software. The dependent variable is stock market development (Market Capitalization) and the three independent variables are foreign remittance, foreign portfolio investment and FDI inflow. The stationarity of data is checked through ADF and PP tests. Correlation and co-integration tests are used. Further to check cause and effect relationship the Granger causality tests is used. The correlation results show that stock market development is correlated with FDI inflow, Portfolio Investment and foreign remittance respectively in all countries except negative correlation of 10.59% between stock market development and Portfolio Investment in Bangladesh. The Granger Causality Tests result shows that FDI granger cause capitalization for India only. Capitalization granger causes FDI in Pakistan and India only. Portfolio investment granger causes in Pakistan and India only while Capitalization granger causes portfolio investment only in India. Foreign remittance granger causes capitalization for Bangladesh and India while Capitalization granger causes foreign remittance in Bangladesh.

Keywords: Foreign Private Investment, Foreign Remittance, Foreign Direct Investment (FDI), Stock Market Development, Foreign Portfolio Investment (FPI), South Asia