Abstract
In this study, we examine an empirical relationship between stock market volatility with the exchange rate and gold prices of an emerging market, “Pakistan”, employing daily and monthly data (PSX-100 Index) covering from 2001: Q3 to 2018: Q2. The study explains the average stock returns by applying MGARCH. Further, it investigates that the volatility in the exchange rate (Rs/US $) and gold prices remain equally strong in bearish and bullish conditions of the stock market by using a quantile regression approach (2001–2018). Additionally, the sample period is divided into two split samples that cover (2001–2007) and (2008–2018) respectively, based on global financial crises and applied similar analysis. The overall results show the negative impact of the exchange rate and gold price volatility on the stock market performance daily (monthly), supporting the argument that the stock market considers the exchange rate and gold price fluctuations as an adverse indicator and reacts negatively.
Highlights
In the wake of the financial liberalization of emerging economies, they have received massive capital inflows and financial asset returns, which are essential for portfolio selections, asset pricing, hedging, and risk management
The average daily exchange rate returns show a positive value of 0.008% with 0.27% volatility, which is quite different from the first split sample and full sample results
The daily and monthly market returns are used for the analysis along with the exchange rate and gold price for the full sample and split-sample period
Summary
In the wake of the financial liberalization of emerging economies, they have received massive capital inflows and financial asset returns, which are essential for portfolio selections, asset pricing, hedging, and risk management. The exchange rate is directly involved; fluctuation in the exchange rate affects the stock market. The stability of the financial markets enhances their potential to sustain themselves in crises and to face unexpected events. An unstable and rapidly fluctuating stock market restricts investor interests and growth-enhancing potential. Analysts and investors consider this an important factor in investment decisions because it is linked to investment returns, portfolios selection, and risk management strategies. Financial integration between markets further increases the intensity of this phenomenon, which includes hedging and risk management perspective (Mun 2007)
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