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Estimation of Causal Relationship between World Gold Prices and Kse 100 Index: Evidence from Johansen Cointegration Technique

Rizwan Raheem Ahmed () and Jolita Vveinhardt ()
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Rizwan Raheem Ahmed: Faculty of Management Sciences, Indus University, Karachi, Pakistan
Jolita Vveinhardt: Faculty of Economics and Management, Vytautas Magnus University, Lithuania

Acta Oeconomica, 2018, vol. 68, issue 1, 51-77

Abstract: The aspiration of this research paper is to investigate the impact of international gold prices on the equity returns of Karachi Stock Index (KSE100 index) of Pakistan Stock Exchange. The daily observations from January 1, 2000 – June 30, 2016 have been divided into three sub-periods along with the full sample period on the basis of structural breaks. Descriptive analysis used to calculate the average returns, which showed significant returns of KSE100 for the full sample, the first and the third sample periods as compared to gold returns. Standard deviation depicted the higher volatility in all the sample periods. Correlation analysis has shown an inverse relationship amid equity returns and gold returns, whereas, Philips-Perron and Augmented Dickey-Fuller tests have been employed, and time series data became stationary after taking the first difference. Johansen cointegration results have shown that the series are cointegrated in the full-sample and the first sample periods. Thus, this has demonstrated the long run association amid equity returns and gold returns in the first sub-sample and the full-sample periods. However, the second and the third sub-sample periods do not exhibit long-term association amid equity returns of KSE100 and gold returns. The outcomes of Granger causality approach identified bidirectional causation amid equity returns and gold returns in the full sample period in lag 2, and unidirectional causality has been observed from gold prices to stock prices in the full sample and the first sub-sample periods in lag 1 and lag 2 respectively.

Keywords: Gold price; KSE 100 index; Johansen cointegration; Philips-Perron test; ADF test; Granger casualty (search for similar items in EconPapers)
JEL-codes: C1 C32 E44 G14 (search for similar items in EconPapers)
Date: 2018
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