Volume 1, Number 2, MAY 2020

Worldwide Journal of Research

Original Article

Foreign Exchange Market, Energy and Gold Price Influencing

Conventional and Islamic Indices (Pakistan Stock Exchange)

Muhammad Rehan 1 Jahanzaib Alvi 2, Corresponding Author: Muhammad Rehan

Hanaa Ibraheem Hussei3 E-mail: rehan.muhammad2626@gmail.com
Ghaziosmanpasa University Tokat, Turkey1
IQRA University Karachi, Pakistan2
University of Duhok- UOD 3

Abstract

T he main purpose of this research is to find out the relationship between stock indices i.e.
Conventional and Islamic index which is taken as dependent variables and foreign exchange
commodities. Further specific objective is to find out that selected variables are useful to predict
each other or not. The sample is taken all conventional indices i.e. KSE_100, KSE_All, KSE_30 foreign
exchange i.e. (USD, UK and EURO) commodities (gold and cured oil) from January 2008 to December
2019 as Islamic Index i.e. KMI-30 has started from October 2008 so data has been taken from October
2008 to December 2019 of Pakistan stock exchange. Unit root test has performed to check whether
data is stationary or not and which test is appropriate for the specific data. OLS and Granger Causality
test are performed with the help of Eviews10 to find the relationship between Stock Indices, Foreign
Exchange and Commodities. This research determines that all conventional indices have a significant
and negative relation with USD and KSE_100 index the only have positive and significant impact with
Cured oil, Islamic Index have only significant and positive relationship with Cured oil. Further,
Granger Causality shows that the only variable is useful to predict the conventional and Islamic index
which is USD.

KeyWords: Granger Causality, Commodity, Foreign Exchange Market, Stock Market Indices, Energy

INTRODUCTION controlled international market, geopolitical

Foreign Exchange Market, Energy (Crude Oil)
and Metal (Gold & Silver) plays a pivotal role in
the economic growth of any country in the world,
even these factor exhibited strong clustering
feature in context to any indices around the globe,
hence Pakistan for instance as one of the many
developing countries constantly facing
8
condition of continents, international trade
sanctioned and in commodities producing
countries causing unpredictability in currencies
market followed by volatilities in stock market
other international crises in commodities
producing countries leads to unpredictability in
exchange market followed by volatilities in the

consequences by the rise and drops of the mention stock market. An enormous calculation of
Page

markets. The constant changes are influenced and statistical data, theoretical support is required to
invest in developing countries market. These
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variables assist them to forecast future prices. The liquid market around the globe. On a large scale,
engagement of the exchange rate and commodity financial institutions usually trade in different
market will assist in determining the great impact currencies. A commodity market trades in the
on the International firm’s evenness either primary economic sector, such as cocoa, fruit and
importing or exporting. As changes in commodity sugar. Hard commodities are mined, such as gold
prices depend on supply and demand, people's and oil.
daily life also depends and influenced by
volatilities in stock prices. And both mentioned Recently, as Pakistan financial and
variables (stock indexes and commodity prices) commodity markets have gone through
are deeply governed by the Exchange rate. unpredictable changes. Rupee in foreign
exchange markets faced enfeeble incessantly
The study focused on how these markets against the dollar. Followed by constant change in
connected, in what pattern they are affecting each the price of natural resources and stock index, it
other, due to that monthly data for one-decade makes each of the mentioned markets in an
year is picked out. The most important objective unstable environment. Therefore, co
of the study emphasized to support investors and arrangements between the markets need to be
traders to decide for future investment. According reviewed and examined.
to studies conducted on risk and return, the
economy in growing countries is considered Our research will answer the following questions.
optimized than the developed countries.1. Is there any association amid Exchange Rate and
Therefore, investors focus more on investing in KSE-100 Index returns?
growing countries to achieve the leadership2. Exchange Rate is useful to predict KSE-100 Index
position. There are sovereign dynamics which returns?
create clustering volatility in stock returns.3. Is there association amid Exchange Rate and
Spillover consequences amongst different stock KSE-30 Index returns?
returns, commodity and foreign exchange occur4. Exchange Rate is useful to predict KSE-30 Index
when information flow across these markets is returns?
neither complete nor instantaneous (Dean, Faff, &5. Is there any association amid Exchange Rate and
Loudon, 2010). The spillover consequences are KSE All Shares Index returns?
explained by the theories such as asset6. Exchange Rate is useful to predict KSE All Share
changeover, hedging demand shifts (Fleming, Index returns?
Kirby, & Ostdiek, 1998) and financial contagion7. Is there association amid Exchange Rate and
(King & Wadhwani, 1990), as described by (Dean KMI-30 Index returns?
et al. 2010). Many factors reason systematic risk8. Exchange Rate is useful to predict KMI-30 Index
and it is important for investors to how reducing returns?
that risk by studying its factors and the9. Is there any association amid Commodities and
consequences of systematic risk factors on KSE-100 Index returns?
investor’s investment decisions will be10. Commodities are useful to predict and KSE-100
unknowing and visionless if they are not heedful. Index returns?
11. Is there association amid Commodities and KSE-
To encourage the development of the 30 Index returns?
economy, generally, investors search for adequate12. Commodities are useful to predict KSE-30 Index
opportunities in the stock markets to gain returns?
additional funds (Dudley and Hubbard, 2004). As13. Is there any association amid Commodities and
forex trading indicates that foreign exchange or KSE All Shares Index returns?
9

trading in currency is considered to be the most14. Commodities are useful to predict KSE All Shares
Page

Index returns?
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15. Is there association amid Commodities and KMI-
30 Index returns?
16. Commodities are useful to predict KMI-30 Index
returns?
In our study we aim to examine the asset classes,
namely, commodity (that include oil and gold
prices) and foreign exchange (US dollar, Pound
sterling, Chinese Yuan and Japanese Yen) on
stock markets indexes (KSE-100, KSE-30, KSE-
All and KMI-30) as a critical and considerable
issue to create understanding for interconnection
for the investors, financial institution and
policymakers. The objectives of the study are as
follows:
1. To empirically modeled long and short-run
association amid Exchange Rate on Stock Market
Indices.
2. To evaluate the association of Exchange Rate on
Stock Market Indices.
3. To empirically scrutinize the long and short-run
connection amid Commodity prices on Stock
Indices of Pakistan.
4. To investigate the connection of Commodity price
on Stock Indices of Pakistan.
This piece of work will be having
considerable contribution in the ground of
research which contribute a framework, yardstick
and an empirically testified model which allows
an investor, a financial institution, a policymaker
and finally a stakeholder the extent dependencies
of the stock market of Pakistan on Foreign
Exchange Rates, Worth of Energy and Metal
(Gold & Silver) reserves which are playing a
pivotal role in the ground of economic growth.
This research gap was found by a detailed review
of the literature and suggested in research
dynamics are quite different compare to previous
studies and extendable too. First, most of the
research papers implicated on mutual linkages
such as the stock market vs. foreign exchange
market or stock market vs. commodity market or
10
commodity market vs. foreign market. We apply
our investigation on the three markets all together
Page
i.e. stock, commodity and foreign market. Bagh,
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Volume 1, Number 2, MAY 2020
T., Azad, T., Razzaq, S., Liaqat, I., & Khan, M. A.
(2017), Basit (2013). Second, we develop our
study for Pakistani market data. The concurrent
equation approach makes it possible to answer to
many questions connected with mutual
interactions and to control for direct and indirect
consequence s in so far as the three markets
correspond to different economic sectors,
different patterns of occupation, national
monetary policies (Ingalhalli & Reddy, 2016).
Stock Market of Pakistan is always found
problematic to predict future returns in
Conventional and Islamic Indices both, hence
creating such model which can contribute
significant art of work for Investors, Financial
Institutions and Policy Makers for decision
making, further the whole crux of this study is
that how Stock market anomalies impacted by
asymmetric term, means clustering feature effect
on stock market volatility, where asymmetric term
refers to negative shocks impact more rather than
positive shocks and these negative shocks are bad
news and unfavorable information and this is
actually the role of sovereign indicators in relation
to stock market fluctuation. Few of them were
employed in this research such as Foreign
Exchange Rates, Crude Oil Price and Gold Price.
Numerous studies have been conducted on the
different time horizon and different land space,
but this study found an empirical room to find out
the fluctuating reasoning in stock market due to
Exchange Rate, Crude Oil and Gold Prices.
LITERATURE REVIEW
(Akileng, Nzibonera, Mutegana, &
Analysis, 2019) conducted a study to examine the
control of foreign exchange rate unpredictability
and interest rate, on the stock presentation of the
firms listed on the Uganda Securities Exchange
(USE) by selecting data of 16 firms for ten (10)
year period. The above study has a vast
connection with the work of Maswere and
Kaberuka, (2013) who uses the Johansen-Juselius
co-integration method to determine the long-run
connection between the prices of stocks listed on
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the USE and macro-economic variables including
interest rate, inflation, real consequences
exchange rate and money supply while (Kitatia,
Zablonb, Maithyac, & Research, 2015) specified
the link (if positive or negative) and authority
degree of the predictor variable on prices of stocks
listed on the Nairobi Stock Exchange and also
studied macro-economic variables including;
interest rate, foreign exchange rate, and inflation
rate by employing correlation and regression
analyses. The study analyzed the results by using
the Arbitrage Pricing Model which showed that
the presentation of the stock of the listed firms in
USE reduces upon an increase of foreign
exchange rate and interest rate. The study
indicates that the performance of the stock on the
USE will shrink when interest rate increases or
when Uganda shilling devalues alongside the US
dollar.
Besides, it emphasizes the degree of effect that
macro-economic factors have on stock
performance. The study concludes the stock
exchange impact thus it operates in macro-
economic environment. The mentioned study is
focused on the consumer theory, demand and
supply of substitutable products.
(Raharja, Darmansyah, & Economy,
2019) studied the link within the global markets
concerning the Indonesia Stock Market (IHSG).
The study focused on four global stock indices
were taken into consideration which consists of
Dow Jones Industrial Average /DJIA (United
States of America), NIKKEI 225 (Japan), Hang
Seng (Hongkong), and STI (Singapore) and 3
commodities market including crude oil, coal, and
gold towards the pressure group of Jakarta
Composite Index (JCI) or known as IHSG. The
main target of studying these variables is to be a
support for investors in making decisions about
investments by predicting the returns of global
stock indexes and global commodities. The study
depends on the monthly secondary data of each
variable. The methods used were several linear
11
regressions during the period (2009-2018) to
evaluate the results, and the finding of this
Page
research as that returns of worldwide stock
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Volume 1, Number 2, MAY 2020
indexes and commodities simultaneously have
serious consequence toward IHSG returns.
(Dash & Maitra, 2018) established a study
to investigate the return and unpredictability
spillover among commodity, stock and exchange
rate markets. And also examine the change in
return and unpredictability spillover during the
crisis and post-crisis periods. Vector Auto
Regression and Granger causality method were
used to understand the causality of returns
throughout 2009-2011. Multivariate
unpredictability model test was employed to find
the unpredictability co-movement of several
assets. The mentioned study concluded as there is
no long term connection between three assets that
are commodity futures, stock index and exchange
rate as there is no common randomly orientation
within three of them, however, they execute a
unidirectional return spillover from the Multi
Commodity Exchange (non- agricultural
commodity) to stock indices and exchange rates.
It was found that during the post-crisis period
equity markets have a return spillover on NCDEX
(agricultural commodity). Theories reflected in
the above study are asset substitution and hedging
demand shift.
(Hunjra, Azam, Niazi, Butt, & Azam,
2011) conducted a study to investigate the
connection between risk and return based on the
uni-variant modeling approach. The study
depends on the monthly data for gold prices, sugar
prices and cotton prices along with the KSE 100
index from July 1998 to July 2008. The main
objective of the study is to justify the seasonal
impact and nonlinear properties on the data of
asymmetric nature for the risk and return
connection scenario hiring GARCH-MEAN and
E -GARCH modeling method. The conclusion of
this study indicate the subsistence of
asymmetrical and seasonal consequence in the
commodities market and stock markets but the
two consequence s were found to be widespread
in stock price risk and return connection. Theories
reflected in the mentioned literature are Portfolio
and Black Shawl pricing model.
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Jahanzaib, Rehan and Saad (2019)

conducted a researched to find out the role of
sovereign indicators on KSE-100 returns, as
sovereign indicators, they employed Interest Rate
(KIBOR), Inflation Rate (CPI) and Exchange
Rate (Dollar to Pkr) and KSE-100 return as the
dependent variable, findings revealed that interest
rate and Inflation rate had a negative association
with KSE-100 Index return, further findings
revealed that interest rate exhibited strong robust
impact on KSE-100 return but inflation possess
the weak effect on stock indices (KSE-100), and
last exchange rate placed significant robust
positive strong effect on KSE-100 index return,
the idea was investor shift their investment if the
risk-free rate is more than market returns and in
their study time Pakistan Stock Exchange was
having foreign direct investment which was
reflecting into the stock market, as exchange rate
increased foreign investor encourage to make a
supernormal profit by investing in Pakistan.
Qayyum & Kemal, (2006) made a
research to determine the unpredictability
spillover between the stock market and the foreign
exchange market in Pakistan. The researchers
depended on Engle-Granger two-step procedures
for long run connection evaluation and the
unpredictability spillover is modeled via the
bivariate E-GARCH method. The outcomes
predestined from co-integration analysis present
that there is no long-run connection between the
two markets. The motivating results were found
through the unpredictability modeling, which
predicts the inter-linkage of the two markets that
refer to the sensitivity of the returns in these
markets. In particular the returns of the stock
market are affected by the unpredictability of the
foreign exchange market. Otherwise returns in the
foreign exchange market are mean reverting and
they are influenced only through the
unpredictability of stock market returns. Thus, it
is concluded as there is an unpredictability
spillover between the two markets in Pakistan.
12
3.2. Hypothesis
H1: There is an association between the
commodities prices and Conventional stock
indices
H2: There is an association between the
commodities prices and Islamic stock index
H2: There is an association between the exchange
rate and Conventional stock indices
H2: There is an association between the exchange
rate and the Islamic stock index
3.3. Research Approach
Research can be qualitative or quantitative based
on this it can be inductive or deductive
respectively. Our research is based on the
quantitative aspect so here deductive approach
will be applied.
3.4. Research Design
The research design for this study is the
longitudinal research design. We have used
secondary sources of data that is panel (time
series) in nature.
3.3 Research Design:
Measurements of variables
The variables included in our study are
1. Commodity
2. Foreign exchange
3. KSE-100 index
4. KSE-All Index
5. KSE-30 Index
6. KMI-30 Index (Islamic)
We have used E-views 10 to perform our tests.
6.6.1. Dependent variable
Dependent variable for our study is stock indices
6.6.2. Independent variables
 Commodities that are Gold and Oil
 Foreign exchange that includes EURO,
POUND, Chinese Yuan, Japanese Yen

and USD
Page

MATERIALS & METHODS

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3.3.1 Data Collection: 3.3.3 Result Analysis:

Secondary data is used for our quantitative
research which was collected from the First Unit root test has been run to
Pakistan Stock Exchange website and check either data is stationary or unit root
companies annual report. to identify the appropriate test for the
model, all variables show that data is
3.3.2 Sample Size: stationary at level in this condition OLS
In this research, we have chosen all indices and Granger Casualty test is the
i.e. KSE_100 KSE_100 KSE_30 and KMI appropriate test for the data.
30 as a dependent variable monthly basis
from 2008 to 2019 as the KMI-30 index Pearson product correlation
has been starting from October 2008 on analysis will be performed with the help of
other side independent variables are Eviews10 to find the relationship between
exchange rates and commodities. dependent and independent variables.

RESULTS & DISCUSSION

TABLE 4.1: Descriptive Statistics
Descriptive
KSE_100 KSE_ALL KSE_30 KMI_30 CO GOLD CHINESE JAPNESE USD UK EURO
Statistics
Mean 0.0098 0.0098 0.0039 0.0157 0.0075 0.0105 0.0069 0.0066 0.0062 0.0032 0.0046
Median 0.0184 0.0169 0.0100 0.0196 0.0188 0.0112 0.0052 0.0067 0.0021 0.0029 0.0052
Maximum 0.1978 0.1682 0.2515 0.2556 0.2036 0.1262 0.0677 0.1166 0.0637 0.0661 0.0668
-
Minimum -0.3616 -0.3374 -0.4505 -0.4028 -0.2606 -0.0659 -0.0626 -0.0829 -0.0484 -0.0963
0.0584
Std. Dev. 0.0660 0.0618 0.0758 0.0676 0.0873 0.0383 0.0165 0.0284 0.0145 0.0249 0.0245
-
Skewness -1.5124 -1.6153 -1.5390 -1.4666 -0.6997 0.3445 0.3461 0.0299 1.1959 -0.5013
0.0239
Kurtosis 10.1207 10.0581 12.3783 13.3095 4.0683 3.1935 6.6471 4.4213 7.1763 4.7307 2.8798
Jarque-Bera 337 339 548 646 17 3 78 11 130 23 0
Probability 0.0000 0.0000 0.0000 0.0000 0.0002 0.2369 0.0000 0.0034 0.0000 0.0000 0.9541
Sum 1.3293 1.3243 0.5208 2.1171 1.0069 1.4128 0.9254 0.8907 0.8381 0.4334 0.6162
Sum Sq.
0.5829 0.5125 0.7708 0.6132 1.0207 0.1966 0.0363 0.1078 0.0280 0.0833 0.0806
Dev.
Observations 135 135 135 135 135 135 135 135 135 135 135
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Above mentioned statistics are defining two broad ADF unit root test has been conducted to check
areas of the data, (1) Population and Data data is a station or not and which test is
Structure, and (2) vulnerability of returns and appropriate for the selected data, above table
currency, currencies fluctuation, Crude Oil Ups shows that the probability of test is less than 5%
and downs, and Gold Price volatilities, coming which means data is stationary at level which
towards Indexes average returns (Median) exhibit means that the regression test is the appropriate
the highest return of KSE-100 Index 1.84% which for the selected data.
is very similar to KSE All Index as 1.69% but
KMI-30 index (Islamic Index) reports the highest
return for all the time as 1.96% including risk
(Standard Deviation) around 6.76%, moreover
the Index KSE-30 having lots of blue-chip
companies had the lowest return at 1.00% but
unfortunately the highest risk associated index at
7.58%, but rest of two indices having very similar
risk associated with them as KSE-100 Index
(6.60%) and KSE All Share (6.18%). Coming
towards the data structure, Skewness witnesses
that KSE-100 Index, KSE All Share Index, KSE-
30 Index, Crude Oil, UK and USD have left tail
data structure and rest Gold, Chinese Yuan and
Japanese Yen have right tail data structure.

TABLE 4.2: Augmented Dickey-Fuller test (ADF)

Test:

Variables Statistics Probability Level

Zero
CO -8.27948 0
Level
Zero
GOLD -10.8858 0
Level
Zero
USD -7.82117 0
Level
Zero
Pound -9.10328 0
Level
Zero
KSE-100 -10.4222 0
Level
Zero
KSE-30 -10.885 0
Level
Zero
KSE-All -10.0793 0
Level
Zero
KMI-30 -11.256 0
Level
14

Analysis:
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Granger Causality Test:

Analysis:
The analysis divided into two major parts first one
is the Convectional stock indices i.e. (KSE_100,
KSE_All and KSE_30) and the other one is
Islamic stock index (KMI_30) results shows only
one variable is commonly impacting the
conventional stock indices i.e. USD, all three
indices have a negative and significant impact of
USD which is part of foreign exchange variable
from the commodities results shows that only
cured oil has a positive impact on KSE_100 index.
Further results reveal that there is no association Analysis:
between dollars and Islamic stock index i.e. KMI- Granger Casualty test has been conducted to
30 only cured oil has a positive and strong impact check that one-time series variable is useful to
on KMI-30. Added to this analysis there is no predict the other or not results shows that the only
autocorrelation in the data which shows the USD P-value is less than 5% against all the
15

Durbin Waston test is almost 2 or near to 2 in indices either Conventional or Islamic which
every model and the probability of F-statistics is shows that USD is the useful variable to predict
Page

less than 5% which shows that model is good. the Pakistan stock exchange indices according to

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the result other variables i.e. (British Pound, Euro,
Cured oil and Gold) are not useful to predict the
Pakistan stock indices.
CONCLUSION & RECOMMENDATION
Conclusion
The study aimed to evaluate the relation between
foreign exchange and commodities that are (Euro,
USD, UK), (crude oil, gold), and conventional
and Islamic Stock index (KSE-100, KSE-All,
KSE-30 and KMI-30) of Pakistan. However stock
market plays an important role in the growth and
development of a country. We have considered
stock indices as dependent variable and
commodity and forex market as independent
variables. The results show that stock indices of
Pakistan are not affected to a greater extent by
fluctuation in the foreign exchange market and
commodity market (crude oil) except USD
fluctuation does have a strong connection upon
stock indices of Pakistan. This research opens up
the new window to the future researchers. Future
researchers may research by including more
microeconomics viable like inflation, interest rate
and by considering daily or weekly data.
Recommendation
Recommendation for Investors:
Investor not only looks after the events in the
market but also consider the Foreign Exchange
Rates, Crude Oil Price and Gold Prices to make
some super natural profit by exploiting market
anomalies.
Recommendation for Financial Institutions:
Financial Institutions should look into the
movement of the FOREX, Crude Oil and Gold
prices to develop optimized portfolio which may
create lucrative returns.
16
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Volume 1, Number 2, MAY 2020
Recommendation for Policy Makers:
FOREX, Crude Oil and Gold Price plays pivotal
role in the growth of any country, policy makers
should consider the policy which is related to
aforementioned variables because these variable
have some direct or indirect effect on the stock
market of Pakistan, and the Stock Market of
Pakistan is the reflection of the Pakistan’s
economy.
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