Asymmetric Effects of Crude Oil Prices and Exchange Rate Shocks on Stock Returns: Firm-Level Evidence from Pakistan

Abstract

Background: Pakistan’s listed oil and gas exploration companies earn revenues tied to world oil prices and the US dollar, yet little is known about whether their share prices respond differently to rising and falling oil prices or to rupee depreciation and appreciation.

Objectives: The study tests whether positive and negative changes in oil prices and the exchange rate have asymmetric effects on the stock returns of Oil & Gas Development Company Limited (OGDC), Pakistan Petroleum Limited (PPL), and Pakistan Oilfields Limited (POL), whether these sensitivities differ across the three firms, and whether oil and exchange-rate information improves return forecasts.

Methods: We use 574 weekly observations from January 2015 to December 2025 obtained from the Pakistan Stock Exchange, the U.S. Energy Information Administration, and the State Bank of Pakistan. We estimate firm-level regressions with Newey–West standard errors, Wald tests, quantile and GARCH-t models, a pooled model with Driscoll–Kraay errors, and walk-forward forecasts from Elastic Net, random forest, and XGBoost models.

Results: A 1% rise in Brent rises in the same week returns by 0.19% to 0.22% for all three firms. On average, responses to oil price increases and decreases are statistically equal, and rupee shocks show no asymmetric effect. Asymmetry appears for OGDC, which barely reacts to falling oil prices, in the upper tail of the return distribution, and in a post-2020 decline in sensitivity to oil price decreases. Oil and exchange-rate predictors improve directional accuracy, but forecast gains are small and concentrated in crisis weeks.

Conclusion: Oil exposure in Pakistani energy stocks is strong, mostly symmetric, and time-varying, so investors and regulators should rely on state-dependent rather than constant measures of oil risk.

JEL Codes Classification: G12, G17, Q43, F31

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