Macro-Financial Determinants of Equity Market Dynamics in a Frontier Economy: A Cointegration, VECM, and GARCH Analysis of the KSE-100 Index, Oil, Gold, Exchange Rate, and Global Volatility (2016–2026)

Abstract

Employing 522 weekly observations from 1st July 2016 to 26 June 2026, this study examines the long-run and short-run relationships between the Karachi Stock Exchange 100 (KSE-100) Index and four key macro-financial variables: the international price of crude oil, the domestic-currency price of gold, the Pakistani Rupee/US Dollar (PKR/USD) exchange rate, and the CBOE Volatility Index (VIX), a widely used global proxy for investor risk aversion. Both Augmented Dickey-Fuller and Kwiatkowski-Phillips-Schmidt-Shin tests confirm that the index, oil, gold, and the exchange rate are all integrated of order one, I(1), while the VIX is stationary in levels, I(0). Applying Johansen trace and maximum-eigenvalue tests, a single cointegrating vector is identified among the I(1) variables, indicating a stable long-run equilibrium relationship (Johansen, S., 1991). A Vector Error Correction Model (VECM) and pairwise Granger causality tests are then used to characterize the short-run adjustment mechanism and the direction of predictive causality, while a GARCH(1,1)-t model captures conditional volatility persistence in weekly index returns. The findings reveal statistically significant Granger causality running from oil, gold, and exchange-rate movements to KSE-100 returns; a high level of volatility persistence (α + β ≈ 0.98); and a high degree of empirical co-movement between gold and the exchange rate, which is explained in the context of Pakistan’s import dependence and dollar-denominated commodity exposure. The paper identifies a specific research gap, the near-absence of decade-spanning, weekly-frequency, multivariate cointegration evidence for the KSE-100 that jointly incorporates a global risk-aversion proxy (VIX) alongside the conventional oil-gold-exchange rate triad, and situates its contribution within the most recent (2023–2026) literature on Pakistani and emerging-market equity linkages. The paper concludes with a discussion of policy implications for exchange-rate management, import substitution, and portfolio diversification, together with an explicit statement of data limitations and directions for future research.