IMPACT OF GLOBAL ECONOMIC POLICY UNCERTAINITY AND OIL PRICE SHOCKS ON PAKISTAN’S STOCK MARKET

Abstract

The current study examines the impact of global economic policy uncertainty and oil price shocks, in conjunction with exchange rate and money supply on the Pakistan stock market and its various sectors. The results found global economic policy uncertainty is significantly and adversely affecting the stock market returns both in short and long run because Pakistan’s economy is dependent on foreign capital inflows. The money supply has a positive and significant impact with one- month lag suggesting expansion in money supply leads to increased availability of funds. The exchange rate has a significant positive impact on returns of stock’s market only in the short run. Analyzing individual sectors, the study reveals that in the long term, global economic policy uncertainty significantly and negatively affects the returns of the oil and gas sector in the stock market. In automobile assembler sector in the long run, global economic policy uncertainty has a negative significant impact on its returns with one-month lag. In cement sector, both in long and short run, the negative impact is insignificant since the sector demand is domestically oriented and does not depend on global uncertainty factors. In chemical sector, the negative impact is significant on returns both in the long and short run. However, the impact is negative but insignificant on returns of food and personal care sector because its demand is domestically oriented. Global economic policy uncertainty has negative and significant impact on returns of pharmaceutical sector with two-months lags. Furthermore, increases in Brent oil prices has a positive impact in the current month but negative impact after one-month lag on returns of Pakistan’s stock market. The negative lag effect of oil prices shock may be due to the fact that oil prices are revised with lags in the country that create uncertainty in financial markets and investors become cautious due to potential impacts on inflation, interest rates, business and economic growth. At sectoral level both in the short and long run, increases in international oil prices has a significant and positive impact on returns in oil and gas sector because oil-producing companies benefit from higher oil prices. However, oil price shock has an insignificant impact on returns in cement sector. Oil prices shocks has significant and positive impact on returns in automobile assembler sector after one month-lag whereas it has insignificant impact on returns in chemical sector. Both in long and short run, Brent oil price shocks have insignificant impact on fertilizer, food and personal care and pharmaceutical sectors. Keywords: Global economic policy uncertainty, Oil price shocks, Exchange rate, Money supply.