Dynamic Linkages among Exchange Rate, Gold Prices, Oil Prices, and Stock Market in Pakistan: Evidence from a Novel Dynamic Simulation Approach

The performance of a stock market is closely linked to a country's overall financial and economic conditions. Stock prices serve as key indicators that reflect the financial health and broader economic situation of a nation, providing valuable insights into real financial activity. This study examines the impact of several macroeconomic factors on stock market performance in Pakistan by utilizing monthly time-series data. The key macroeconomic factors considered include the exchange rate (EXR), oil prices (OP), gold prices (GP), interest rates (IR), the consumer price index (CPI), and the industrial production index (IPI). The analysis employs a novel dynamic simulated Auto-Regressive Distributed Lag (DARDL) approach, along with the bounds cointegration test, to explore the connection between variables. The cointegration results validates the presence of a long-term relationship amongst the chosen variables. Furthermore, the novel DARDL findings reveal that EXR, GP, OP, CPI, and IR exert a significant negative influence on the stock market, highlighting their adverse influence on market performance. In contrast, IPI exhibits a significant positive association, emphasizing its role in driving stock market growth. These results provide valuable insights into the relation between macroeconomic factors and stock market dynamics, offering important implications for policymakers and investors in Pakistan.