The Asymmetric Impact of Oil Price Shocks on Sectoral Returns in Pakistan: Evidence from the Non-Linear ARDL Approach

Dilawar Khan,Róbert Magda,Judit Oláh,Basit Ali,Muhammad Shafiq

doi:10.3390/economies10020046

Abstract

This study explores the asymmetric impact of oil supply and demand shocks on the sectoral stock market returns of Pakistan. For this purpose, the study uses the non-linear autoregressive distributed lag (ARDL) approach based on monthly time series data for four sectors in the Pakistan Stock Exchange over the period 2005–2018. First, the findings of the unit root tests identified that all data series are stationary at first difference. Second, the F-bound test explored that oil supply and demand shocks have a cointegration relationship with sectoral stock market returns. Third, the study explored the asymmetric impact of oil supply shocks (OSS) and oil-specific demand shocks (OSDS) on sectoral returns of commercial banking and the symmetric impact of oil demand shocks (ODS) on sectoral returns of commercial banking. In addition, the asymmetric impact of oil supply shocks (OSS) and oil demand shocks (ODS) on sectoral returns of the power generation, chemical and fertilizer sectors was found. Moreover, the symmetric impact of oil-specific demand shocks (OSDS) on sectoral returns of the power generation, chemical and fertilizer sectors was explored. The study suggests important policy implications for policymakers and investors.

Highlights

It is generally contended that the stock market is a barometer of any country’s economic condition
This study explores the asymmetric impact of oil supply and demand shocks on sectoral returns in Pakistan, using monthly data over the period 2005–2018
The findings suggest that the partial sum of positive oil supply shocks (OSS) positively and significantly influences the stock returns of commercial banking in Pakistan, both in the short and in the long run

Summary

Introduction

It is generally contended that the stock market is a barometer of any country’s economic condition. Whereas the oil price shocks amend the uncertainty of investment, create demand for a higher rate of returns from investors and the business sector, which leads to constraints in the level of investment in the already suffering stock market and inhibits the level of investment in financial and real asset sectors. Whereas oil price shocks amend the uncertainty for investment create a demand for higher rate of returns by investors which will lead to constraining the level of investment at stock market and inhibiting the level of investment in financial and real assets. Keeping in view the above discussion, the contribution of this study is threefold: first, this study will identify the causes of the change in the global oil price, that is, supply or demand shocks, most of the previous studies explored the impact of oil prices on sectoral returns, considering aggregated financial markets.

Data and Methodology

Results and Discussion

Conclusion

Conclusions and Policy Implications