Econometric Modeling of Price Dynamics: A Study of Crude Oil, Cotton, Gold and Exchange Rates in Pakistan Mercantile Exchange (PMEX)

Commodity markets in emerging economies, such as Pakistan, face heightened sensitivity to global and domestic shocks; yet, research gaps persist in understanding volatility interdependencies at the Pakistan Mercantile Exchange (PMEX). This study examines price dynamics and spillover effects among crude oil, gold, cotton, and exchange rates—critical to Pakistan's trade-dependent economy—using daily data (2013–2022). Methodologically, GARCH models reveal volatility clustering (crude oil: ω = 0.16, p = 0.00), DCC-GARCH uncovers time-varying correlations (crude oil-exchange rates: 0.22; crude oil-cotton: -0.13), and VAR models quantify cross-market spillovers. Results identify crude oil as the dominant shock transmitter, with the strongest contagion to cotton (spillover = 0.26). Post-2020 pandemic disruptions amplified volatility, underscoring the role of global factors. Exchange rate movements significantly influence commodity prices, reflecting Pakistan's reliance on imports. The findings highlight interconnected risks, urging the adoption of diversified hedging strategies to mitigate spillovers, particularly between energy and agricultural markets. Policymakers are advised to stabilise exchange rates and monitor global crude oil trends to bolster market resilience. This study provides actionable insights for investors and regulators navigating Pakistan’s commodity markets amid external shocks, addressing a critical gap in emerging market research.