Crude oil price affects sector indices: A case study of Pakistan Stock Exchange

Effects of Crude Oil Price Changes on Sector Indices of Pakistan Stock Exchange

Abstract

The objective of this study is to investigate how fluctuations in crude oil prices affect the sector indices of the Pakistan Stock Exchange. Given that even slight variations in oil prices can have a global impact and affect the economy of oil-importing countries, it is important to understand how different sectors of the Pakistan Stock Exchange, such as the chemical, cement, technology, automobile, oil & gas, and power generation sectors, are impacted by such changes. The study uses monthly data from June 2012 to June 2016 and employs the ADF test to check for stationarity. After taking the first difference, the ADF test is applied again, and the data becomes stationary. The study applies co-integration tests and finds two co-integrations and long-run associations. VECM is applied when data is co-integrated, and the results show that none of the variables have long-run causality, but some variables have short-run causality. Sectors that are more sensitive to oil price changes show a stronger impact when oil prices change. Thus, investors should consider monitoring oil prices when making investment decisions in the stock exchange.