ASYMMETRIC EFFECT OF GOLD AND OIL PRICES ON STOCK MARKET PERFORMANCE IN PAKISTAN: NEW EVIDENCE FROM ASYMMETRIC ARDL COINTEGRATION
Keywords:
Asymmetric Cointegration, Asymmetric ARDL, Oil Prices, Gold Prices, Pakistan Stock MarketAbstract
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 non linear, 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.
References
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Economics and Finance, 24, 208-222. https://doi.org/10.1016/
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bounds testing approach to cointegration. Pakistan Economic and
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commodity markets?. Applied Energy, 89(1), 273-280. https://doi.org/
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GDP growth: empirical evidence for some OECD countries.
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0003684042000281561
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of Finance, 51(2), 463-491.
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import demand in India: Empirical evidence from threshold and
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GCC countries: new evidence from nonlinear cointegration
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Crude Oil Price Changes and Stock Market Returns. International
Journal of Economic Sciences & Applied Research, 4(3), 75-92.
Arouri, M. E. H., Lahiani, A., & Nguyen, D. K. (2015). World gold prices
and stock returns in China: insights for hedging and
diversification strategies. Economic Modelling, 44, 273-282.
Banerjee, A., Dolado, J., & Mestre, R. (1998). Error-correction mechanism
tests for cointegration in a single-equation framework. Journal
of time series analysis, 19(3), 267-283. https://doi.org/10.1111/
1467-9892.00091
Baur, D. (2012). Asymmetric volatility in the gold market. The Journal of
Alternative Investments, 14(4), 26-38. https://doi.org/10.3905/
jai.2012.14.4.026
Beckmann, J., & Czudaj, R. (2013). Gold as an inflation hedge in a timevarying
coefficient framework. The North American Journal of
Economics and Finance, 24, 208-222. https://doi.org/10.1016/
J.NAJEF.2012.10.007
Bekiros, S. D., & Diks, C. G. (2008). The relationship between crude oil
spot and futures prices: Cointegration, linear and nonlinear
causality. Energy Economics, 30(5), 2673-2685.
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Reserve Bank of San Francisco’s Conference on Asia and the Global
Financial Crisis, Santa Barbara, California, October 19, 2009 (No.
481). Board of Governors of the Federal Reserve System (US).
Brown, R. L., Durbin, J., & Evans, J. M. (1975). Techniques for testing
the constancy of regression relationships over time. Journal of
the Royal Statistical Society. Series B (Methodological), 149-192.
https://doi.org/10.2307/2984889
Capie, F., Mills, T. C., & Wood, G. (2005). Gold as a hedge against the
dollar. Journal of International Financial Markets, Institutions and
Money, 15(4), 343-352. https://doi.org/10.1016/J.INTFIN.2004.07.002
Chen, A. S., & Lin, J. W. (2014). The relation between gold and stocks: an
analysis of severe bear markets. Applied Economics Letters, 21(3),
158-170. https://doi.org/10.1080/13504851.2013.844321
Chen, J., Naylor, M., & Lu, X. (2004). Some insights into the foreign
exchange pricing puzzle: Evidence from a small open economy.
Pacific-Basin Finance Journal, 12(1), 41-64. https://doi.org/
10.1016/S0927-538X(03)00020-9
Choi, J. J., Hiraki, T., & Takezawa, N. (1998). Is foreign exchange risk priced
in the Japanese stock market?. Journal of Financial and Quantitative
Analysis, 33(3), 361-382. https://doi.org/10.2307/2331100
Choudhry, T., Hassan, S. S., & Shabi, S. (2015). Relationship between gold
and stock markets during the global financial crisis: Evidence from
nonlinear causality tests. International Review of Financial
Analysis, 41, 247-256. https://doi.org/10.1016/J.IRFA.2015.03.011
Chua, J. H., Sick, G., & Woodward, R. S. (1990). Diversifying with gold
stocks. Financial Analysts Journal, 46(4), 76-79. https://doi.org/
10.2469/faj.v46.n4.76
Cologni, A., & Manera, M. (2008). Oil prices, inflation and interest rates in a
structural cointegrated VAR model for the G-7 countries. Energy
economics, 30(3), 856-888. https://doi.org/10.1016/J.ENECO.2006.11.001
Di Iorio, A., & Faff, R. (2001). A test of the stability of exchange rate risk:
Evidence from the Australian equities market. Global Finance Journal,
12(2), 179-203. https://doi.org/10.1016/S1044-0283(01)00027-8
Dhaoui, A., & Bacha, S. (2017). Investor emotional biases and trading
volume’s asymmetric response: A non-linear ARDL approach tested
in S&P500 stock market. Cogent Economics & Finance, 5(1),
1274225. https://doi.org/10.1080/23322039.2016.1274225
Driesprong, G., Jacobsen, B., & Maat, B. (2008). Striking oil: another
puzzle?. Journal of Financial Economics, 89(2), 307-327.
https://doi.org/10.1016/J.JFINECO.2007.07.008
Dumas, B. (1978). The theory of the trading firm revisited. The Journal
of Finance, 33(3), 1019-1030. https://doi.org/10.1111/j.1540-
6261.1978.tb02041.x
Ewing, B. T., & Malik, F. (2013). Volatility transmission between gold and oil
futures under structural breaks. International Review of Economics
& Finance, 25, 113-121. https://doi.org/10.1016/J.IREF.2012.06.008
Fareed, Z., Meo, M. S., Zulfiqar, B., Shahzad, F., & Wang, N. (2018).
Nexus of tourism, terrorism, and economic growth in Thailand:
new evidence from asymmetric ARDL cointegration approach.
Asia Pacific Journal of Tourism Research, 23(12), 1129-1141.
Ferson, W. E., & Harvey, C. R. (1994). Sources of risk and expected
returns in global equity markets (No. w4622). National Bureau
of Economic Research.
Ghatak, S., & Siddiki, J. U. (2001). The use of the ARDL approach in estimating
virtual exchange rates in India. Journal of Applied statistics, 28(5),
573-583. https://doi.org/10.1080/02664760120047906
Ghosh, D., Levin, E. J., Macmillan, P., & Wright, R. E. (2004). Gold as an
inflation hedge?. Studies in Economics and Finance, 22(1), 1-25.
https://doi.org/10.1108/eb043380
Goodman, B. (1956). The price of gold and international liquidity. The
Journal of Finance, 11(1), 15-28.https://doi.org/10.1111/j.1540-
6261.1956.tb00683.x
Gronwald, M. (2008). Large oil shocks and the US economy: Infrequent
incidents with large effects. The Energy Journal, 151-171.
https://doi.org/10.2307/41323148
Hamilton, J. D. (2009). Causes and Consequences of the Oil Shock of
2007-08 (No. w15002). National Bureau of Economic Research.
https://doi.org/10.3386/w15002
Hau, H., & Rey, H. (2005). Exchange rates, equity prices, and capital
flows. The Review of Financial Studies, 19(1), 273-317.
https://doi.org/10.1093/rfs/hhj008
Henriques, I., & Sadorsky, P. (2008). Oil prices and the stock prices of alternative energy companies. Energy Economics, 30(3), 998-
1010. https://doi.org/10.1016/J.ENECO.2007.11.001
Ibrahim, M. H. (2015). Oil and food prices in Malaysia: a nonlinear ARDL
analysis. Agricultural and Food Economics, 3(1), 2.
https://doi.org/10.1186/s40100-014-0020-3
Ilyas, M., Ahmad, H. K., Afzal, M., & Mahmood, T. (2010). Determinants
of manufacturing value added in Pakistan: An application of
bounds testing approach to cointegration. Pakistan Economic and
Social Review, 209-223. https://doi.org/10.2307/25825362
Ji, Q., & Fan, Y. (2012). How does oil price volatility affect non-energy
commodity markets?. Applied Energy, 89(1), 273-280. https://doi.org/
10.1016/J.APENERGY.2011.07.038
Jiménez-Rodríguez*, R., & Sánchez, M. (2005). Oil price shocks and real
GDP growth: empirical evidence for some OECD countries.
Applied economics, 37(2), 201-228. https://doi.org/10.1080/
0003684042000281561
Jones, C. M., & Kaul, G. (1996). Oil and the stock markets. The journal
of Finance, 51(2), 463-491.
Kanjilal, K., & Ghosh, S. (2014). Income and price elasticity of gold
import demand in India: Empirical evidence from threshold and
ARDL bounds test cointegration. Resources Policy, 41, 135-142.
Kaufmann, T. D., & Winters, R. A. (1989). The price of gold: A simple
model. Resources Policy, 15(4), 309-313.
Kilian, L. (2008). Exogenous oil supply shocks: how big are they and how
much do they matter for the US economy?. The Review of Economics
and Statistics, 90(2), 216-240. https://doi.org/10.1162/rest.90.2.216
Kilian, L., & Park, C. (2009). The impact of oil price shocks on the US
stock market. International Economic Review, 50(4), 1267-1287.
https://doi.org/10.1111/j.1468-2354.2009.00568.x
Kremers, J. J., Ericsson, N. R., & Dolado, J. J. (1992). The power of
cointegration tests. Oxford bulletin of economics and statistics,
54(3), 325-348. https://doi.org/10.1111/j.1468-0084.1992.tb00005.x
Kumar, D. (2014). Return and volatility transmission between gold and
stock sectors: Application of portfolio management and hedging
effectiveness. IIMB Management Review, 26(1), 5-16.
https://doi.org/10.1016/J.IIMB.2013.12.002
Lardic, S., & Mignon, V. (2008). Oil prices and economic activity: An asymmetric
cointegration approach. Energy Economics, 30(3), 847-855.
Maghyereh, A., & Al-Kandari, A. (2007). Oil prices and stock markets in
GCC countries: new evidence from nonlinear cointegration
analysis. Managerial Finance, 33(7), 449-460. https://doi.org/
10.1108/03074350710753735
Mahdavi, S., & Zhou, S. (1997). Gold and commodity prices as leading
indicators of inflation: Tests of long-run relationship and
predictive performance. Journal of Economics and Business,
49(5), 475-489. https://doi.org/10.1016/S0148-6195(97)00034-9
Meo, M. S., Chowdhury, M. A. F., Shaikh, G. M., Ali, M., & Masood Sheikh,
S. (2018). Asymmetric impact of oil prices, exchange rate, and
inflation on tourism demand in Pakistan: new evidence from nonlinear
ARDL. Asia Pacific Journal of Tourism Research, 23(4), 408-422.
Meo, M. S., Khan, V. J., Ibrahim, T. O., Khan, S., Ali, S., & Noor, K. (2018).
Asymmetric impact of inflation and unemployment on poverty in
Pakistan: new evidence from asymmetric ARDL cointegration. Asia
Pacific Journal of Social Work and Development, 1-16.
Narayan, P. K. (2005). The saving and investment nexus for China: evidence
from cointegration tests. Applied economics, 37(17), 1979-1990.
Okwuchukwu, O. (2015). Exchange rate volatility, stock market
performance and foreign direct investment in Nigeria.
International Journal of Academic Research in Accounting,
Finance and Management Sciences, 5(2), 172-184.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches
to the analysis of level relationships. Journal of applied
econometrics, 16(3), 289-326.
Prasad, E., Rogoff, Prasad, E., Rogoff, K., Wei, S. J., & Kose, M. A. (2005).
Effects of financial globalization on developing countries: some empirical evidence. In India’s and China’s recent experience with
reform and growth (pp. 201-228). Palgrave Macmillan, London.
Ramos, S. B., & Veiga, H. (2013). Oil price asymmetric effects: Answering the
puzzle in international stock markets. Energy Economics, 38, 136-145.
Ramos, S. B., Veiga, H., & Wang, C. W. (2012). Asymmetric long-run
effects in the oil industry (No. ws120502). Universidad Carlos
III de Madrid. Departamento de Estadística.
Raza, N., Shahzad, S. J. H., Tiwari, A. K., & Shahbaz, M. (2016).
Asymmetric impact of gold, oil prices and their volatilities on
stock prices of emerging markets. Resources Policy, 49, 290-301.
Romilly, P., Song, H., & Liu, X. (2001). Car ownership and use in Britain: a
comparison of the empirical results of alternative cointegration estimation
methods and forecasts. Applied economics, 33(14), 1803-1818.
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Published
2018-12-15
How to Cite
Saeed, M., Hafeez, M., Shaikh, G. M., & Shahid, D. M. (2018). ASYMMETRIC EFFECT OF GOLD AND OIL PRICES ON STOCK MARKET PERFORMANCE IN PAKISTAN: NEW EVIDENCE FROM ASYMMETRIC ARDL COINTEGRATION. Journal of Business Strategies, 12(2), 43–64. Retrieved from https://greenwichjournals.com/index.php/businessstudies/article/view/341
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