How do exchange rate and oil price volatility shape Pakistan’s stock market?

Abstract

Changes in oil prices and currency values significantly influence economic systems worldwide, with pronounced effects on equity markets. This study specifically examines the consequences of oil price changes and currency value fluctuations on the volatility of Pakistan's stock market, exploring both direct and indirect pathways. Employing the Tobit regression model, it investigates how the volatility of oil prices and exchange rates impacts the volatility of stock returns in the Pakistani context. The findings underscore the importance for investors and policymakers in Pakistan to consider the implications of oil and currency volatility when assessing investment risks and opportunities in the stock market. This research contributes to the understanding of the intricate relationships between oil price volatility, exchange rate fluctuations, and stock market dynamics in Pakistan, offering valuable insights for informed decision-making.

Keywords: Volatility, Tobit Regression, Probit Regression, Oil Price, Exchange rate