An Analysis Of The Impact Of China Pakistan Economic Corridor(CPEC)on Pakistan Stock Market

China Pakistan Economic Corridor(CPEC)acknowledged Pakistan Stock Exchange(PSX)as an eye-catching market place for local and foreign stockholders.The performance of the Pakistani Stock Exchange(PSX)has been incomparable in the last few years.The inauguration of development schemes under the umbrella of China Pakistan Economic Corridor(CPEC)has been acknowledged as the vital aspect behind increasing shareholder sureness.The bullish movement in the Pakistani markets has sustained from there on and is prospective to continue,while work on China Pakistan Economic Corridor(CPEC)associated projects have gained thrust.CPEC is the paramount central part of One Belt One Road(OBOR).The prominence of CPEC to China is replicated by its insertion as a measure of China’s 13 th five-year growth design.The novelty of this thesis is that very few scholars have done empirical research on CPEC.The contribution of this thesis is in the area of behavioral finance and its association with the performance of the Pakistan Stock Exchange(PSX).For this purpose,three empirical studies were conducted to investigate the impact of an economic event(CPEC)on the Pakistan Stock Exchange.CPEC is being hyped as a game-changer for Pakistan and it is one of the biggest super projects ever started.In this context,this thesis is aimed to find the answers on the following issues:(1)Does CPEC News impact Pakistan Stock Exchange? An Event Study Methodology.(2)Does Herding Behavior exist in Pakistan Stock Exchange due to CPEC news? Is this herding behavior fundamental herding or non-fundamental herding?(3)Does the spillover effect exist between China and Pakistan Stock Markets? The key findings from each study are summarized below.The first empirical study focuses on the impact of China Pakistan Economic Corridor(CPEC)news on the Pakistan Stock Exchange(PSX)using an event study methodology.The purpose of this study is to check the impact of CPEC news about fundamental dealings linked to the CPEC agreement by using event study methodology;to capture the equity market perception of the role that this historical agreement may play in the future economic growth of Pakistan.Our main independent variable in this study is CPEC News.For KSE – 30 Index using event window(-1,+1);Events 1,2 and 3 showed significant impact while event 4 shows insignificant.Similarly,I used another event window(-3,+1);Events 1 and 3 showed a significant impact.The second empirical study focuses on the herding behavior due to CPEC news for KSE – 30 Index(All,Up & Down Days)and KSE All companies(All,Up & Down Days).The purpose is to find herding behavior in the Pakistan Stock Exchange(PSX)when fundamental news regarding CPEC is released.This paper contributes to the literature when CPEC announcements are released in the media and its effect on stock valuation and then reconcile it with the herding behavior literature.In this paper,I used announcements dates related to CPEC news and announcements when information relevant to CPEC is released in the media.Later,herding behavior due to CPEC news will be decomposed to fundamental herding and non-fundamental herding.I will determine whether this herding behavior due to CPEC news is either fundamental or non-fundamental.When stock investors face a similar information driven set it is known as fundamental “spurious” herding while those who follow the trading behavior of others intentionally is known as “intentional” herding.Herding behavior due to CPEC news is present in KSE – 30 Index(All & Up Days)and KSE All companies(All & Up Days).It is not present in the down days of the KSE – 30 Index and KSE All companies.I found herding behavior due to CPEC news in sectors listed on the Pakistan Stock Exchange(PSX).After decomposing of this herding behavior due to CPEC news into fundamental and non-fundamental herding,I found that herding behavior due to CPEC news is fundamental.Pakistani investors are generally more optimistic about China Pakistan Economic Corridor(CPEC).Pakistani Investors think CPEC is good for economic development.The third empirical study examines the spillover effect between Pakistan and China stock markets.Trade linkages,capital flows and banking connections are the main fundamental factors causing spillover effects.A spillover can be transmitted through trade.CPEC is an economic corridor and it is a collection of several infrastructure projects through which economic activities between China and Pakistan will increase.Thus increased trade integration makes countries more vulnerable to spillover.For the spillover effect between Pakistan and China all companies,it is unidirectional.It is present only from Pakistan to China;but not from China to Pakistan.The reason is increased trade ties because of CPEC and China possesses 40% of the Pakistan Stock Exchange(PSX).Moreover,the CPEC(China-Pakistan Economic Corridor)initiative is a very specific factor that is expected to positively impact the capital market both directly and indirectly.Therefore,from the strategic investor’s perspective,investment in Pakistan Stock Exchange(PSX)is indeed an attractive proposition.