Oil Price Uncertainty and Stock Market Returns in Pakistan: Investigating the Interactive Role of FDI and FPI in the KSE-100 Index

Abstract

The uncertainty in oil prices is one of the most important threats to financial markets all over the world, especially in oil importing emerging economies like Pakistan. For this study, it was decided to study how oil price uncertainty affects the returns of Pakistani KSE-100 stocks, and how Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI) moderate the effect of uncertainty on return on equities, and how macroeconomic factors mediate the effect of uncertainty on returns on KSE-100 stocks in Pakistan. The study employed Quantitative and explanatory research design and secondary time series data source was used including from Pakistan Stock Exchange (PSX), State Bank of Pakistan (SBP), World Bank and International Oil Market (IOM) databases. Econometric methods such as regression analysis, ARDL modeling, moderation analysis and mediation testing were used to investigate the relationships between the variables and come up with results and insights. The results indicated that the degree of uncertainty in oil price has significant and negative impact on the KSE-100 stock market returns through the channel of macroeconomic instability and impact on investors' confidence. This study adds to the financial economics literature by linking the oil price uncertainty, foreign investment flows, and macroeconomics under one umbrella for the case study of Pakistan. The results have important policy, investment and regulatory implications for promoting market stability and sustainable investments in the presence of uncertainty.