Global Financial Conditions and Domestic Transmission: Equity Returns in Pakistan and Türkiye

This paper uses confirmatory factor analysis and a structural equation modeling approach on stock returns in Pakistan and Türkiye in order to separate the global financial shocks from domestic economic fundamentals utilizing monthly stock returns data from July 2004 to August 2025. Evaluating four latent constructs (global conditions, domestic monetary conditions, external sector pressure, and real economy activity), a multi-group estimation shows that both markets share an identical global pricing factor driven by joint reflation and risk aversion components, with Türkiye exhibiting greater sensitivity to global risk sentiment, and that this global channel is not intermediated by the domestic external account. Domestic mechanisms diverge sharply: monetary policy transmission influences equity prices in Pakistan, where equities also suffer from inflation and exhibit left-tail sensitivity to external shocks, whereas Turkish equities function as an inflation hedge and show no comparable domestic monetary channel. Roughly sixty percent of cross-market co-movement survives after conditioning on the shared global cycle. These results indicate that external sector defenses such as reserve buffers cannot be expected to shield domestic equity from global financial dynamics and that domestic monetary policy influences local asset prices only where its transmission channel is functional.