IMPACT OF OIL PRICE, EXCHANGE RATE, AND INTEREST RATE ON STOCK MARKET OF PAKISTAN

Abstract

Stock market is important for the development of a country since it provides liquidity for the production process. Exchange rate and oil prices are the most vital economic variables that affect the stock market of an economy besides the interest rate which evidently have significant impact on stock returns. This study examines the impact of oil prices changes, exchange rate variations, and interest rate changes on stock returns of Pakistani stock market represented by KSE 100 index. Using monthly data for the period of January 2000 - December 2021 and employing bound testing approach to auto regressive distributed lag (ARDL) modelling, the short and long run relationship between these variables is examined. The study finds that oil prices, exchange rate and interest rate have significant impact on stock returns in Pakistan. The short run dynamics and interactions of these variables are further analysed by an appropriate error correction model.