Oil Price Shocks and Stock Market Performance: A comparison between Oil Exporting and Oil Importing Nations

The paper explores the impact of shocks in oil prices on the stock market for the oil importing and exporting nations. As Pakistan is heavily dependent on imports of oil therefore, we focus on Pakistan as an oil importing nation and have taken Iran, as an oil exporting nation because, it is considered to be among top ten nations of the world that exports oil. Various studies in Pakistan have investigates the relationship between shocks in prices of oil and return on the stock but none of the study has examined the association between shocks in oil prices and return on the stock market by comparing Pakistan and Iran as an oil importer and exporter nations of the world. This study has employed Autoregressive Distributed Lag model to find out the relationship between dependent and independent variables. We have taken prices of oil as an independent variable, whereas, stock price has been taken as a dependent variable. On the other hand, rate of exchange and rate of interest are the other independent variables. The results of this study and bound test reveals a long run association between prices of oil and the stock return for both nations. It has been indicated in the results that high oil prices have an adverse impact on market of stock for an oil importing nation (i.e., Pakistan) and have positively impacted on Iran which is an oil exporter nation. The results confirm that oil price shock contributed towards positively affecting the market of stock of an oil exporter nation but negatively affected the stock market if an oil importing nation. The author recommended the investors of both nations to evaluate various alternatives to diversify portfolios of their stock market by utilizing other financial assets.