Relationship between Oil Prices, Gold Prices, and Stock Returns: Evidence from Pakistan Stock Exchange

Abstract

This research highlights the dynamic relationship between oil prices, gold prices, and the Stock returns in the Pakistan Stock Exchange, and how they impact each other and provide information on the connectedness that we can see in oil-importing, gold-influenced countries due to the political economy of commodities that are affected by inflation. The simplest way to integrate the three variables is to examine the interest rate effect in the market. The researcher collected twelve monthly data sets from 2014 to 2024 and applied the Vector Autoregression (VAR) model to test the short- and long-run dynamics of oil and gold prices and PSX returns. The research findings confirmed that oil prices exhibited the most significant shocks and impacted stocks through inflation-based pressures and rising costs of production, while gold acts as a hedge in troubled economic times with a stabilization effect. Overall, the results reflected the asymmetry of financial markets as they provide essential reflections for investors, policymakers and stakeholders in academia about the behavior of financial markets, improving investment strategies, and creating effective economic policies for developing countries like Pakistan.

Keywords: Oil Prices, Gold Prices, Stock Returns, Stabilization Effect, Financial Markets