Impact of gold and oil prices on the stock market in Pakistan.
| Autor | Shabbir, Aiza |
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Introduction
Investment is such money that is put away for future use. There are many ways through which investors can invest their money, for example, in the shape of gold and foreign currency. In the shape of investment in gold, the investors have found significant benefits. The investment in gold is known as tangible assets investments. According to different investors, gold is known as a much-trusted investment. Gold is also known as quite a safe investment from the financial crisis. It has been seen that gold is a less risky investment than other assets. Past studies have proved that there is a significant relationship between gold prices and the stock market. It could consider gold as a safe investment (Baur and Lucey, 2010).
In Pakistan, since the past few decades, the gold prices were very high. It had reached 55 thousand in these years, and the international gold market was also affected. An increase in the prices of gold has badly affected the economy. Gold prices are known as the best indicator of the economy of a healthy economy. The decrease in gold prices means the economy is going downward direction. Oil cost is known as the basic aspect of determining industrial production. The cost of gold has affected the worldwide development of the economy (Baur and McDermott, 2010).
In 2005, the international economy was in the position of the downturn because the cost of gold was near about the US$416 per ounces. According to different researchers, gold is known as the store of value. In November 2010, the gold cost was at the peak it was US $1,421 per ounces. The association between the gold rate and the interest rate is negative. Marx's concept of cash was a very crucial aspect of describing the adoption of cash. Prices of gold can be predicated based on the prediction. Researchers have proved that there is no connection between oil costs and gold costs. Pakistan's financial development is 7% while it is seen that after its freedom its financial development is not more than 5%. Pakistan's financial development has been dropped at 2.7% low financial development is the first barrier for the development of the country. Because this financial crisis, Pakistan's hardship was affected badly the Government of Pakistan has taken 715bn for the improvement of the poverty of Pakistan (Bampinas and Panagiotidis, 2015).
In the modern era, the oil crisis is the blood for every economy. Oil prices have indeed helped out the maintain the level of oil prices. We are trying to find out the impact of oil prices on the stock market. We also try to explore that investors would like to invest in the stock market or gold prices. There is reserved work related to the impact of the oil crisis on the stock exchange. There are three main researchers-related prediction of economic growth.
All over the world, oil is known as the more crucial source of energy. Oil prices are known as the biggest need of every country, and because of this reason prices bring an effect on the performance of the country. Now a days, the prices of oil are as important as gold prices. The world's largest commodity market is known as the crude market. Different scholars proved that crude oil impacts the economy of the countries. Oil prices have also impacted the consumption and production of the commodity (Ciner et al., 2013).
The gold investment gives a sense of certainty to the investors during financial downturns and can be considered as an alternative and attractive investment owing to the simplicity of the gold market. Gold can also be viewed as a portfolio diversifier because of its low correlation with other assets and therefore lowers the overall portfolio risk (Ciner et al., 2013). Notably, the central banks also retain gold for diversification purposes and to safeguard from economic uncertainties (Kaufmann and Winters, 1989).
1.1 Problem statement
A lot of Previous studies were performed on this topic (Kanjilal and Ghosh, 2014), as they have mainly analysed the stock, gold and oil linkages in a linear setting. Some scholars make an argument that one basic shortcoming of linear modelling is that it assumes that time series are linear, while in real times, they are non-linear. Prior studies have also examined the volatility relationships in a linear setting (Arouri et al., 2011; Hammoudeh and Yuan, 2008; Sadorsky, 2014) and found that commodities volatilities can explain the stock prices. Moreover, significant volatility transmission is also witnessed from commodities to stock markets. Very few studies are found on this topic in the context of Pakistan. The sample size was small in previous studies. Oil and gold cost has affected the worldwide development of the economy. This will contribute to theory in the future. The objectives of the study are as follows:
to determine the relation between oil prices and stock market; and
to determine the relation between gold prices and stock market.
The research is significant for government and policymakers, as it will assist them to know how much the stock market is considered to be one of the most important components of any modern economy that provides the access to the capital of the public and makes it available for use by business entities. It will help them to know if economic relationship would be stronger in the future then Government of Pakistan would be more successful in improving its relationship with the other western world in general terms as an integral part of a developing economy the stock market of Pakistan can be expected to be a more important investment method in the future and will be expanded as it absorbs an increasing amount of the investment capital from domestic investors. Policymakers need to know who is responsible for planning the development of the economy to educate themselves about this subject and need to have a broad, general understanding of the behaviour of this market. Furthermore, because gold is one of the most popular tools the Pakistani Government uses to implement its monetary policy and also it is very important for monetary authorities to have a clear understanding of the possible relationships between gold and the stock market. This study may also become a beginning step for further research into the behaviour of the stock market. It will also contribute to theory standpoint.
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Literature review and hypotheses
Raza et al. (2016) examined the asymmetric impact of gold prices, oil prices and their associated volatilities on stock markets of emerging economies. Monthly data were used from January 2008 to June 2015. The nonlinear autoregressive distributed lag (ARDL) approach was applied to find short-run and long-run asymmetries. The empirical results indicated that gold prices harm stock market prices of large emerging Brazil, Russia, India, and China (BRIC) economies and a negative impact on the stock markets of Mexico, Malaysia, Thailand, Chile and Indonesia. Oil prices harm the stock markets of all emerging economies. Gold and oil volatilities have a negative impact on stock markets of all emerging economies in both the short- and the long-run. The results indicated that the stock markets in the emerging economies are more vulnerable to bad news and events that result in uncertain economic conditions.
Afsal and Haque (2016) said that the price movements in the gold market are considered to detect non-linear dependencies with the stock market in the Saudi Arabian context. Both the univariate and multivariate models of generalised autoregressive conditional heteroskedasticity (GARCH) class were used in this study . Initially, the work used GARCH (1,1) specification to detect the persistence level of volatility. Proceeding further, a series of models are used to study leverage effect, spillover pattern, risk-premium effects, absolute returns and power transformation factors. Finally, diagonal Baba, Engle, Kraft and Kroner specifications were used to determine the contagion effect between gold and stock markets. The findings chiefly proved that a dynamic relationship between gold and the stock market does not exist.
Najaf and Najaf (2016) said that owing to the global financial crisis, around all over the world all developing and under-developing countries are facing a low trading profit. In most developing countries like Pakistan, there is a low investment level owing to political instability. Because of his condition, the Karachi Stock Exchange has the worst sell. Karachi Stock Exchange is known as the oldest and more profitable stock exchange of Pakistan oil and gold prices are attracting investors towards there, not in the stock exchange. They said that this thing is a barrier to the progress of the development of the country. This research was trying to expose that the stock market is going down because of these variables. For checking the impact of oil and gold prices on the Karachi Stock Exchange, they have used secondary data for this study. For this purpose, they had taken data from Karachi Stock Exchange from 1996 to 2013. The correlations had shown that in these markets there is not a positive relationship. Karachi Stock Exchange and gross domestic product (GDP) have an inverse relationship with the gold market. These results had also shown that oil growth has a significant relationship with KSE100 and GDP. For the prediction, correlation is not considering an authentic measure.
Basher and Sadorsky (2016) used dynamic conditional correlation (DCC), asymmetric dynamic conditional covariance and Generalized Orthogonal Garch (GO-GARCH) models to examine the conditional correlation among gold, oil and the price index presenting emerging stock markets. Notably, volatility estimation using GARCH-type models for a large data set is a challenging task because of the curse of dimensionality, i.e. the tradeoff between feasibility and generality. The estimations through multivariate GARCH models, e.g. Baba, Engle, Kraft and Kroner allow...
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