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 2009-20 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.Keywords: Oil prices; Gold market; exchange rate; Stock market; PakistanJEL Classifications: G10, G11, G12DOI: https://doi.org/10.32479/ijeep.9653
Highlights
Oil consumption plays a significant role in modern economies from running production machinery to the transportation of agricultural goods as well as human resources engaged in the provision of services
Demand-supply imbalances lead to oil price fluctuations—resulting in broader economic implications for the global economy
Highest monthly returns for the selected period are reported for stock markets (KMI 1.34% and KSE 1.30%) and least positive returns are for the gold market
Summary
Oil consumption plays a significant role in modern economies from running production machinery to the transportation of agricultural goods as well as human resources engaged in the provision of services. In specific sectors, including agriculture and industry (utilising engine technologies) contribution by oilconsumption is direct, while in other areas (services) it contributes indirectly through transportation At this point in time, managing an economy without oil-consumption is beyond imagination, exploration in certain other energy resources (e.g., renewable energy sector) is at rising, yet the significance of oil is unquestionable, so far. Such a critical resource of modern economic settings carries significant implications for other sectors of the economy and any mismanagement in the supply chain leads to consequences for the whole economy. A positive shock is fruitful for exporter (higher cash inflow) but not for the importer (higher cash outflow) and vice versa
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