Pakistan’s Stock Market Reaction to Large and Small Shocks in Oil Prices: An Assessment with the MT-NARDL Model

Abstract

 This article empirically explores the impact of both small and large fluctuations in the crude oil prices on Pakistan’s stock market utilizing the multiple threshold non-linear autoregressive and distributed lag model from 1997–2021. The empirical results demonstrate that larger shocks to the prices of crude oil have a significant negative impact on Pakistan’s stock market. However, small shocks to the prices of crude oil positively stimulate its activity. Pakistan’s stock market is heavily and asymmetrically impacted by the United States’ stock market: positive shocks, reflected in the Standard & Poor’s 500, have a positive impact on Pakistan’s stock market, while negative shocks have an adverse effect. All estimated coefficients are statistically significant. Pakistan’s stock market is also negatively affected by foreign direct investments (FDI) and exchange rates, but the inflow of remittances has a positive effect. Based on empirical findings, the article recommends that policymakers in both the private and public sectors should estimate the expected fluctuations in the prices of crude oil, FDI, remittance inflows, and exchange rates when investing in the Pakistani stock market. 

JEL: G0, G1, G2