Sensitivity Analysis of Macroeconomic Forces and Sectoral Returns: Evidence from Energy and Textile Sectors of Pakistan

Abstract

The basic purpose of this study is to empirically test the impact and sensitivity of macroeconomic factors on Energy and Textile sector of Pakistan. Secondary data is used for Macroeconomic variables, KSE-100, Textile and Energy Sector for the period 2008-2015. OLS, Unit Root Test, Granger-Causality and GARCH (1,1) tests have been used to analyze the senstivity behaviour. Resutls reveal that energy sector has most strong and positive relationship with market returns and this element is one of the major drivers of Pakistani equity market and the Textile sector has strong and negative relationship with change in crude oil price. Textile has also strong and positive relationship with change in exchange rate. Moreover, it is concluded that change in oil prices has negative and significant impact on energy sector. Further Exchange rate, inflation rate and market return have positive and significant impact on energy sector. There exists negative sensitivity and significant relationship between lagged textile return to present textile return. Further it is concluded that there exists negative sensitivity and significant relationship between lagged changes in crude oil price to present textile return. Moreover, there exists positive sensitivity and significant relationship between lagged changes in exchange rate to the current textile returns.