Oil Price and Stock Market Fluctuations: Emerging Markets (A Comparative Study of Pakistan and China)

IntroductionOil is considered to be the most important source of energy in all over the world and gaining iimnense importance as a tool for security and survival of developed countries. Due to a biggest need of every country each change in the price of oil brings effect on the financial environment of developed and developing countries. Now a day's oil price took the importance as the gold price. World's largest commodity market is cmde oil market and effects of price change in cmde oil are not just direct impact but change in oil price also have indirect impact on economy not to mention international stability is predicting through oil price changes and vice versa. So, oil price change besides affecting production and consumption like other coimnodities can also be cause of change in behavior of investors and stock prices.Emerging economies act as an important engine in the process of global economy recovery. Between 2008 and 2013, emerging markets have contributed to approximately 80% of the world economic growth. Along with the pace of increased flow of capital worldwide, expectation of local currency appreciation and uncertainties of developed economies, more and more investors turn their eyes to emerging markets.If it the trend of international crude oil prices observed then it is mentioned and also supported by literature that the prices of oil in the era of 1990s was traded between $18 to $ 23. But it crossed the limit of $40 in 2004 and rose steadily and reaches on $60 in 2005. While in the middle of 2007, it is priced $70 and crossed the highest limit of 178$ in middle of 2008. These shocks have great and iimnense importance for oil importing countries like Pakistan, China, India etc. literature argued that these shocks shows negative impact on the economy of oil importing countries. These pass-through effects firstly petroleum and petroleum goods. These in return affect the productivity downfall, which leads to adverse affects different economic factors along with stock market capitalization.Oil price shocks can lead to inflation, especially to those oil-importing countries. Thus policy makers may face the pressure to increase the interest rate which makes stock market less attractive. Raising oil costs decrease the cash flows of companies and expectation of increasing interest rate also reduce the value of stocks. Therefore, oil price booming becomes an important risk to stock markets. Compared to developed economies, emerging economies are more vulnerable to oil price shocks. On one hand, increasing demand and lack of energy efficiency lead to a high oil intensity. On the other hand, lack of experiences in overseas oil investment and hedging oil price risk in international financial market makes emerging markets have few instruments to eliminate the negative effects of oil shocks.The first goal of this paper is to provide a systematic investigation of the impact of oil price changes on the Pakistani and Chinese stock market. Furthermore investigate the intensity of this relationship. It is also try to review the possible consequences and challenges presented by high oil prices for Pakistan and China. As Basher &Sadorsky (2006) whenever oil price shock occur the countries who import oil lessen their disposable income in result of that they have less income to spend on goods and services therefore they must find alternative energy sources. They also suggested that non oil producing countries also face high cost and risk of uncertainty which affect stock markets and in result lesser investment. While oil exporting countries have opposite and positive effect of oil price change studied by Le & Chang (2011). On the strength of prior studies, this paper is adding some quality work in literature. therefore the fundamental idea of this study is to examine oil price and stock price volatility in emerging markets so the evidence is taken from Pakistan and China over the period of 1998M1-2013M12. …