Symmetric and asymmetric nexus between economic freedom and stock market development in Pakistan

This study investigates symmetric and asymmetric association between the economic freedom index and sustainable stock market development (SMD) in Pakistan. Economic freedom consists of four constructs namely rule of law, regulatory efficiency, government size and open market. The study uses Nonlinear Autoregressive Distributed Lag (NARDL) and ARDL models covering annual time series data (1993-2020). The results affirm significant nonlinear responses of the stock market for positive & negative decompositions of the Index with its certain components that were unaddressed before. The analysis indicate that rule of law and regulatory efficiency do not impact SMD, while government size and open market significantly affect sustainable SMD. Significant bi-directional Granger causality exists between the rule of law and the open market. Evidence of bi-directional causality from SMD to the rule of law and regulatory efficiency has also been found. The ARDL frame indicates that lesser government-intervened financial markets supported by the relaxed rule of law, regulatory efficiency, and fraud-free market mechanisms shall lead to sustainable stock market development. Open market and government size ultimately become significant with negative coefficients. The proofs of asymmetry pave the way for introducing modified or structural implications by replacing recommendations of ARDL with NARDL for a more sustainable policy-making with accurate forecasting. The diagnostic tests for positive and negative extricate precariousness in future decision-making by adding credence to earlier conclusions.