The linkage between oil price, stock market indices, and exchange rate before, during, and after COVID-19: Empirical insights of Pakistan

Abstract

This study analyzes the trilateral relationship between macroeconomic variables of oil prices, stock market index, and exchange rate to demonstrate their behavior and inter-relationship in the economic setup of Pakistan. The investigated period includes daily time series data ranging from 4 January 2016 to 30 April 2021. The study consists of three sub-periods: the pre-COVID-19 period ranging from 4 January 2016 to 31 December 2019, COVID-19 period ranging from 1 January 2020 to 30 April 2021, and overall period ranging from 4 January 2016 to 30 April 2021 by using a Vector Autoregressive (VAR) model. The results illustrate that oil prices changes, and stock index have an insignificant direct relationship both in pre-COVID-19 and overall sub-periods of study while a positive and statistically significant relationship during the COVID-19 period. This research also suggests that stock index has a direct and statistically significant but negative impact on the exchange rate in all sub-periods of study. This research also gives practical implications for forex investors and traders to analyze the inflating and deflating stock market patterns for future investment opportunities. However, most of the previous studies emphasized on the direct influence of exchange rate on the stock market and no effort is made on vice versa association. Furthermore, this research presents a practical relevance for the stock market investors that health uncertainty regime affected the insignificant association between oil price and stock market indices and this relation turns out to be significant during the crisis regime.

Keywords:

• Transmission mechanism between OP and ER
• Oil prices and stock market indices
• COVID-19
• Unrestricted VAR framework
• Variance decomposition in VAR
• IRF
• Stock market indices

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Mosab I. Tabash

Mosab I. Tabash is currently working as Associate Professor at the College of Business, Al Ain University, UAE. He has published many papers in journals of repute. His research interests include finance, Islamic banking, monetary policies, financial performance, and investments.

Zaheeruddin Babar

Zaheeruddin Babar is working at the Faculty of Management Studies, University of Central Punjab, Pakistan. He possesses several professional and academic degrees and have greater focus on practice-oriented research. He has published many papers in journals of repute indexed by Scopus, WOS, and ABDC.

Umaid A Sheikh

Umaid A. Sheikh has completed several academic degrees including BBA-Hons and Master of Business Administration from Comsats University, Islamabad. His research works appear in other scientific journals indexed by Scopus, WOS, and ABDC.

Ather Azim Khan

Ather Azim Khan is working as Dean of Faculty of Management and Administrative Sciences, University of Sialkot, Pakistan. He has published many papers in journals of repute.

Suhaib Anagreh

Suhaib Anagreh is working as Assistant Professor at Higher Colleges of Technology, Dubai. His area of research includes finance and banking.