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

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.