Financial Development and Bubbles: The Case of the Karachi Stock Exchange of Pakistan



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Financial Development and Bubbles:

The Case of the Karachi Stock Exchange of Pakistan

Ehsan Ahmed

Department of Economics

James Madison University

Harrisonburg, VA 22807 USA
J. Barkley Rosser, Jr.

Department of Economics

James Madison University

Harrisonburg, VA 22807 USA

Tel: 540-568-3212

Fax: 540-568-3010

Email: rosserjb@jmu.edu
Jamshed Y. Uppal

Department of Business and Economics

Catholic University of America

Washington, D.C., 20064 USA

March, 2010

Abstract: Speculative bubbles present a problem for the development of sophisticated financial markets in developing economies. This paper discusses the evolution of regulatory institutions in Pakistan pertaining to the Karachi stock exchange and empirically tests for the presence of stock market bubbles in that stock market in recent years. A fundamental is estimated using a VAR approach, and residuals of this fundamental are tested for trends using Hamilton regime switching and Hurst rescaled range methods. Nonlinearities beyond ARCH are also tested for using the BDS test. We are unable to reject the hypothesis of no bubbles or non nonlinearities during the period studied, indicating that Pakistan faces this difficult problem in developing appropriate regulations and institutions for the oversight of its financial markets.


Keywords: Asia, Pakistan, emerging markets, financial regulations, speculative bubbles





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