Relationship Between Oil and Stock Markets: Evidence From Pakistan Stock Exchange

Abstract

This study documents the impact of price variations in global markets, specifically oil, on stock returns at Pakistan stock exchange (PSX). We select three global markets (oil, gold and currency exchange) and two PSX indices (conventional and Islamic) for a period 2009-2020 to provide evidence. Monthly data for the selected time series is used for analysis. Analysis techniques include descriptive statistics, stationarity testing, Johansen cointegration, correlation and regression analysis. Findings suggest joint long-run co-movements of selected markets. Regression results indicate the significance of oil prices at 1% level, with positive signs, in the stock return generation process at PSX (for both indices conventional and Islamic). Other selected markets (gold and currency exchange) are although significant but at a higher degree, with negative signs. For the oil market, results confirm the demand-pull inflation hypothesis in Pakistani market. Results also confirm shifting to gold market by investors in the period of reductions in stock returns. Finally, depreciation of domestic currency discourages investors in buying stocks. We recommend investors to have an eye on oil, gold and currency markets while making investment decisions at PSX. We also recommend to policymakers to take timely actions for exchange rate stability, to avoid the outflow of capital. To the best of our knowledge, this is the only study documenting the influence of global markets on stock returns at PSX in recent years.

Do the electricity price shocks influence the Sectoral Production and KSE100 Index in Pakistan? An ARDL structural breaks approach

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“…is the previous month price, and Ln is a natural log (Hanif, 2020). Further, adding the control variable like government expenditure, money in circulation, foreign direct investment and wholesale prices can improve the relationship between electricity price and sectoral production.…”

Modelling the Conditional Co-Movements of Pakistan and International Stock Markets

“…However, if capital inflows aren't adequately distributed, financial uncertainty and contagion may be the result (Das & Manoharan, 2019). An important shortcoming in portfolio diversification that became widely recognised after the GFC [the Global Financial Crisis] as buy-and-and-hold investors started to increasingly use the market as a vehicle for holding investments was that global portfolios had lower diversification and higher volatility (Jiang et al, 2017;Hanif, 2020).…”

Volatility Spillovers Between Oil Prices and Stock Returns in Developing Countries

“…Studies investigating the relationship between oil price movements and macroeconomic variables are more frequently encountered in the literature. In studies investigating the relationship between oil prices and stock markets, it has been found that there is generally a positive relationship between oil markets and stock markets (Sadorsky, 1999;Sadorsky, 2001;El-Sharif et al, 2005;Lescaroux and Mignon, 2008;Bjornland, 2009;Mendoza and Vera, 2010;Wang et al, 2013;Hanif, 2020). In some other studies, the existence of a negative relationship between oil markets and stock markets has been advocated (Filis, 2010;Filis et al, 2011;Cunado and Gracia Perez, 2014).…”