Exchange Rate Exposure of the Financial Sector of Pakistan

This study evaluates the foreign exchange exposure of financial sector of Pakistan particularly banking and insurance sectors. We estimate the Augmented Market Model,which reveals that market returns of banks are being foretold by the variations in the set of exchange rates and return benchmarks KSE100 index. On the vicissitude, banking sector returns in the context of short and long-run impact ensue of the antecedents. We find a motley the propensity towards bank returns in the long and short run. None of the currencies have the strongest exposure for all banks however the JPY, USD, and GBP are ponderously explaining the stock performance of the banking sector of Pakistan. In addition, we analyze the relationship between financial sector and exchange rates returns and volatilities. Where we find negative correlation between returns and volatilities, however weak to moderate coefficients observed between financial sector returns and exchange rate volatility. In addition, we perform VAR-Impulse response to examine how financial sector reacts due to shocks in exchange rates. We notice the negative instantaneous responses of banking, insurance and market returns due to shock.