Asymmetric Effect of Gold and Oil Prices on Stock Market Performance in Pakistan: New Evidence from Asymmetric ARDL Cointegration

Abstract

The previous studies on stock market modelling in Pakistan context has assumed a linear relationship between stock market performance and its determinants. Most of the macroeconomic variables do not have linear properties, therefore considering asymmetric features of macroeconomic fundamentals, this study is a first attempt to explore the asymmetric impact of gold and oil prices on the stock market performance of Pakistan, covering the time period of 1990 – 2016. For the consideration of nonlinear, short-run and long-run associations between gold, oil prices and stock market performance, a novel approach of nonlinear ARDL or asymmetric ARDL is being used. The long-run parameters of the study affirm the asymmetric association between gold, oil prices and stock market performance, while short-run dynamics validate the asymmetric association between oil prices and stock market performance. Furthermore, negative and significant link between the exchange rate and the stock market was also found. The empirical outcomes propose that ignoring intrinsic asymmetries may lead to the misrepresentative implications in case of stock market performance. The achieved suggestion of asymmetries, both short and long-run dynamics could be of key prominence for more effective policy-making and to forecast the Pakistan Stock Market.