Examining the asymmetric effects of stock markets and exchange rate volatility on Pakistan’s environmental pollution

Abstract

The purpose of this study is to observe the effects of stock markets and exchange rate volatility on environmental pollution in Pakistan during the period 1985–2018. A nonlinear autoregressive distributed lag (ARDL) model is applied to get this objective. In general, the short-term results revealed that the positive and negative shocks in stock markets reducing the carbon emissions. In adverse, positive shocks in exchange rate volatility reduces the carbon emissions while negative shocks in exchange rate volatility have a positive significant effect on carbon emissions in Pakistan. Moreover, the positive and negative shocks in the stock market have a positive significant effect on Pakistan’s carbon emissions but positive and negative shocks in exchange rate volatility negative influence on carbon emissions in the long run. The findings further show that positive and negative shocks of the stock markets and exchange rate volatility have the same effects in sign but different in magnitude in the long run. Based on these findings, some policy recommendations proposed in the context of Pakistan as well as for other developing countries.