An Investigation of the Impact of Globalization on Financial Markets

Abstract

The present study examined the effect of globalization on the financial markets of Pakistan based on an extensive mixed-method research project between 2000-2023. The study relied on secondary data provided by State Bank of Pakistan, Pakistan Stock Exchange, World Bank and IMF databases and was also complemented by structured interviews with 15 senior financial sector professionals. Important results demonstrated that there is a strong positive correlation between the measures of globalization and the measures of the development of financial markets in Pakistan. KOF Globalization Index was found to be strongly related to growth of stock market capitalization (r=0.74), inflows of foreign direct investment (r=0.68) and openness to trade (r=0.82). But globalization also raised the volatility and sensitivity of markets to external shocks. The qualitative analysis reflected that, although globalization made markets more efficient, liquid and more exposed to international capital, it also opened up Pakistani financial markets to more systemic risks and contagion effects. The paper found regulatory frameworks to be important mediating variables in the management of the two impacts of globalization. Time series analysis proved the enhancement of the financial sector growth rate in more globalized times, especially after 2008 when Pakistan introduced the extensive financial liberalization policy. These results can be added to the existing knowledge on the relationship between globalization and the emergence of new financial systems in the market and give a clue to policymakers who struggle to find their way in the world of global integration.

Keywords : Effect, Globalization, Financial Markets, State Bank of Pakistan, Pakistan Stock Exchange.