Asymmetrical relationship between oil prices, gold prices, exchange rate, and stock prices during global financial crisis 2008: Evidence from Pakistan

Abstract

The study investigated that whether the relationship between macroeconomic fluctuations and stock indexes is symmetrical or asymmetrical in nature. This study employed nonlinear autoregressive distributed lag models for the times before and after 2008 economic crises. The overall sample period contains 168 observations between January 2004 and December 2018. The period between January 2004 and December 2007 was considered as pre-economic crisis period containing 48 observations whereas, period between January 2008 and December 2018 was considered as post-economic crisis containing 120 observations. Four different types of unit root tests, i.e., augmented Dickey Fuller test, Philips Perron test, Zivot-Andrew unit root, and Kwiatkowski Philips Schmidt Shin test have been employed to find out the stationarity in data. Findings suggested that in the long run and before global financial crisis, investors react differently to gold prices and oil prices. In long run and after crisis, investors have shown different reactions to all macroeconomic fluctuations. This showed that after crisis, investors reacted differently to positive and negative shocks of gold prices, exchange rate, and interest rate. Another interesting aspect that after global financial crisis, investors reacted only to positive shocks of gold prices, interest rates, and exchange rate in long run. This research contributes to existing literature by identifying that relationship between macroeconomic fluctuation and stock prices is asymmetric in nature whereas, in previous researches authors have assumed linearity in the time series data. The asymmetric effect of macroeconomic variables on stock prices should be considered for investors, governments, and other stakeholders during investment decisions.

Keywords:

• Asymmetrical
• nonlinear autoregressive distributive lag model
• macroeconomic variables and stock prices
• stock prices
• global financial crisis

PUBLIC INTEREST STATEMENT

During 2008, Pakistan was not directly affected by the global financial crisis, however, suffered from severe macroeconomic imbalances. GDP growth rate has been depreciated from 6.8% to 4.1%, with the current account deficit in Pakistan. The global financial crisis has depleted Pakistan’s currency reserves and hindered the growth of overall economy. FDI has been depreciated from $5400 million in 2007 to only $3710 million in 2009. Due to decline in FDI, GDP, unemployment, and exports, Pakistan reached IMF for bailout package. Fiscal deficit rose to 7.1% with current account deficits raised above 8.1% of total GDP. Pakistan had $16 billion in foreign-currency reserves before the global financial crisis, however, foreign exchange reserves depleted to only $5 billion but after the crisis. The consumer price index was elevated which resulted in unemployment and higher interest rates. This research is unique because it investigated asymmetric effect of macroeconomic variability on stock prices for three specified time frames, e.g., precrisis, postcrisis, and over the entire period.

Notes

1. A dummy variable is also created in order to deal with structural breaks. 0 is for period before 2008 and 1 for period after 2008. Dummy variables is included in NARDL models of postcrisis and whole sample period.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Umaid A. Sheikh

Umaid A. Sheikh has also published previously in Journals indexed in Web of Science Core Collection and Australian Business Dean Council. He has completed several academic degrees including BBA(hons), MBA, and Master of Philosophy in Accounting and Finance. His research interest includes Behavioral Finance, Financial Economics, Development Economics, Energy Economics, Business Economics, Time series and Panel data modelling.

Muzaffar Asad

Dr. Muzaffar Asad is working as an Assistant Professor at University of Bahrain, College of Business Administration. He completes his PhD in Entrepreneurial Finance and has supervised several research projects in the field of entrepreneurship, finance, and business management.

Zahid Ahmed

Dr. Zahid Ahmad has been associated with the University of Central Punjab for the last 10 years. He is a well-known professor of Statistics holding MPhil and PhD (Statistics) from Government College University, Lahore.

Umer Mukhtar

Umer Mukhtar is Assistant Professor at GIFT Business School, GIFT University.