Abstract
The paper explores the impact of shocks in oil prices on the stock market for the oil importing and exporting nations. As Pakistan is heavily dependent on imports of oil therefore, we focus on Pakistan as an oil importing nation and have taken Iran, as an oil exporting nation because, it is considered to be among top ten nations of the world that exports oil. Various studies in Pakistan have investigates the relationship between shocks in prices of oil and return on the stock but none of the study has examined the association between shocks in oil prices and return on the stock market by comparing Pakistan and Iran as an oil importer and exporter nations of the world. This study has employed Autoregressive Distributed Lag model to find out the relationship between dependent and independent variables. We have taken prices of oil as an independent variable, whereas, stock price has been taken as a dependent variable. On the other hand, rate of exchange and rate of interest are the other independent variables. The results of this study and bound test reveals a long run association between prices of oil and the stock return for both nations. It has been indicated in the results that high oil prices have an adverse impact on market of stock for an oil importing nation (i.e., Pakistan) and have positively impacted on Iran which is an oil exporter nation. The results confirm that oil price shock contributed towards positively affecting the market of stock of an oil exporter nation but negatively affected the stock market if an oil importing nation. The author recommended the investors of both nations to evaluate various alternatives to diversify portfolios of their stock market by utilizing other financial assets.
Highlights
In this paper, the origin of shocks in oil price has been considered by using the Auto Regressive Distributed Lag model in order to investigate the correlation between prices of oil and stock market prices for oil-exporting and oil-importing countries
Multivariate CCC-Generalized Auto Regressive Conditional Heteroscedasticity (GARCH) model has been applied by Cifarelli and Paladino (2010) and provided evidence that exchange rate and stock price changes are negatively related with oil price shifts
This research study investigates the impact of shocks in oil prices on stock return in oil exporting and oil importing nation
Summary
The origin of shocks in oil price has been considered by using the Auto Regressive Distributed Lag model in order to investigate the correlation between prices of oil and stock market prices for oil-exporting and oil-importing countries. Unilabiate regime-switching EGARCH model was applied by Aloui and Jammazi (2009) to examine the relationship between crude oil shocks on Japanese, UK and French stock markets. A unilabiate regime-switching GARCH model has been applied by Lee and Chiou (2011) to examine this relationship They concluded that, when there are significant fluctuations in prices of oil, so negative impacts on S&P 500 returns has been found due to the resultant unexpected asymmetric changes in price, but the result does not hold in a regime of lower fluctuations in oil price. The volatility spillovers and conditional correlations between Dow jones, FTSE100, NYSE and S&P500 stock indices and crude oil (Brent markets and WTI) has been investigated by using symmetric DCC-GARCH model
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