This paper explains the relationship between foreign exchange reserves of Pakistan and KSE market capitalization on the basis of quarterly gathered data from fiscal year 2001 to 2009. Both of the variables under consideration are very important because foreign exchange reserve is one out of the major supports to stable the value of home currency against foreign currencies and market capitalization shows the overall investment in stock market. This study uses simple linear regression model to measure the relationship between these two important variables. Results of this study show that there is positive (not significant positive) relationship between variables. The results show that foreign exchange reserves of Pakistan have a positive impact on KSE Stock Market that is the principal stock market of Pakistan. Introduction
This research is carried out to find the impact of foreign exchange reserves held by the State Bank of Pakistan on the investment and performance of stock markets of Pakistan. There are three stock exchanges (Karachi Stock Exchange, Lahore Stock Exchange and Islam-Abad Stock Exchange) operating in Pakistan. Karachi Stock Exchange (KSE) is premier, biggest and the most popular stock market of the country, so it is used as representative of all stock exchanges of Pakistan. About KSE
KSE is hub of capital formation in Pakistan, established on September 18, 1947. KSE started with 5 companies with a paid up capital of Rs. 37 million. The first index was the 50 index and trading was done through open-out-cry system. In spite of political issues, social, financial and other problems, it played a key role in the economy of Pakistan. KSE 100-index showed a return of 40.19% and became the sixth best performer among the emerging markets in the calendar year 2007. It achieved a major milestone by touching of KSE-100 Index psychological level of 15,000 for the first time in its history and peaked 15,737.32 on 20 April, 2008. Moreover, the increase of 7.4 per cent in 2008 made it the best performer among major emerging markets (Gulf News, 2008). It was declared the “Best Performing Stock Market of the World for the year 2002″ as declared by the international magazine “Business Week” Similarly, the US newspaper “USA Today” declared Karachi Stock Exchange as one of the best performing stock exchange in the world. As at June 1, 2009 there were 651 companies listed at KSE with market capitalization of US $ 26.48 billion having listed capital of US $ 9.65 billion. Exchange was owned by 200 member/brokers through electronic trading system. (Karachi Stock Exchange, 2009) Foreign Exchange Reserves
Foreign exchange is the currency of other countries and Foreign Reserves mean deposits of international currencies held by a central bank. Foreign reserves allow governments to keep their currencies stable, reserves are used as a tool of exchange rate and monetary policy, it facilitate for the payment of external debt and liabilities, it act as a defense against unexpected emergencies and economic shocks. To know about the relationship of foreign reserves with stock market is important because of above reasons and because international reserves accumulation has been the preferred policy recently adopted by developing economies to achieve financial stability. The aim of this policy is to increase liquidity and thus reduce the risk of suffering a speculative attack. (Cruz & Walters, June 2008). Foreign reserves can be enhanced by storing more and more international currency and this can be done through three ways, by increasing exports, by foreign remittance and by taking official grants or loans. If foreign reserves are increasing due to exports and remittances then the growth of reserves is positive but if it is increasing with the help of loans then growth will be negative. This research is not concerned with the positive or negative growth,...