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Asymmetric Impact of Exchange Global Business

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Rate Volatility on Commodity Article and
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DOI: 10.1177/0972150920916287
10.1177/0972150920909002
10.1177/0972150920916287
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Mohsen Bahmani-Oskooee11 , Ahmed Usman2 and Sana Ullah3

Ahmed Usman2
Sana Ullah3

Abstract
China is the largest trading partner of Pakistan. Therefore, it is very important to consider the trade flows
between Pakistan and China and their response to rupee–yuan volatility. Previous research assumed
that response of trade flows to measure of volatility is symmetric. In this study, our basic objective is
to check whether the trade flows respond to volatility in a symmetric or asymmetric manner. Annual
data over the period 1980–2018 for 14 Pakistani industries exporting to and 34 industries importing
from China are analyzed. We find short-run asymmetric effects of exchange rate volatility in almost all
industries that last into long-run asymmetric effects in 40–50 per cent of industries. Non-linear models
yielded more significant effects of volatility than the traditional linear models.

Keywords
Exchange rate volatility, commodity trade, asymmetry effects, Pakistan, China

Introduction
Pakistan is an important country of South Asia with a total gross domestic product (GDP) of US $312.57
billion in 2018 and ranked 39th in the world in terms of nominal GDP.1 The geo-strategic position of
Pakistan is also very important because it shares a common border with China and India, which are
among the largest economies of the world. The relationship of Pakistan with India has not been very
friendly since its creation, but Pakistan enjoys very cordial relations with China. Pakistan has recently
signed a multi-billion-dollar deal with China which is also a part of China’s One Belt One Road initiative

1
Center for Research on International Economics, University of Wisconsin, Milwaukee, USA.
2
Department of Economics, Government College University Faisalabad, Pakistan.
3
School of Economics, Quiad-i-Azam University, Islamabad, Pakistan.

Corresponding author:
Mohsen Bahmani-Oskooee, P.O.Box 413, Center for Research on International Economics, University of Wisconsin, Milwaukee, WI
53201, USA.
E-mail: bahmani@uwm.edu
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and is known as China–Pakistan Economic Corridor (CPEC). Initially, China planned to invest US $46
billion in infrastructure and in the fields of energy, transport and industry, but it has now crossed US $60
billion. Apart from CPEC, Pakistan and China’s bilateral trade has surpassed US $16 billion,2 and it has
the potential to be increased manifold (Ullah et al., 2018). Nevertheless, the balance of trade is heavily
tilted in favour of China. Therefore, it is very important from Pakistan’s perspective to look into factors
that can improve this balance between Pakistan and China and can extend the trade between the two
friendly countries further.
One factor that could affect the trade between the two countries is the volatility of the real rupee–yuan
rate. A glance through the volatility measure of this rate as depicted in Figure 1 reveals that, indeed, the
rate has been volatile during our study period. How are trade flows between two countries affected by
this volatility? Before we answer this question, let us see where the literature stands so that we can
clearly see in which direction we are extending the literature.
With the breakdown of the Bretton–Woods system of fixed exchange rates in 1971 and with the
advent of floating exchange rate system, exchange rates started to fluctuate very frequently. This initiated
a new discussion in the field of international finance. Some experts like Clark (1973) and Ethier (1973)
were of the view that due to the risk-averting behavior of traders, increased volatility in currency rates
may depress the trade volumes. On the other hand, a few theorists like Franke (1991), Sercu and Vanhulle
(1992) and Viaene and de Vries (1992) supported the opinion of enhanced trade flows as a result of
increased volatility in exchange rates. However, there were few people who sustained the idea that
volatility had no noticeable effect on the trade volumes. McKenzie (1999) and Bahmani-Oskooee and
Hegerty (2007) have accounted for one or the other idea discussed above in much detail. They have
covered most of the articles since the fall of the fixed exchange rates, whether theoretical or empirical,
and found that exchange rate volatility may have negative, positive or no effect on trade flows. The two
reviews reveal that the literature is so large that almost every country has its own literature, and our
country of concern, Pakistan, is no exception.

Figure 1. Real Exchange Rate Volatility

Source: The authors.

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Bahmani-Oskooee et al. Global Business Review 24(3)3

Studies that addressed the issue of the trade flows of Pakistan can be divided into three groups. The
first group of studies consists of those that have included Pakistan in their study along with some other
developing economies and have used Pakistan’s exports to and imports from the rest of the world, an
aggregate concept. Bahmani-Oskooee and Payesteh (1993) assessed the exports and imports response to
exchange rate volatility in six developing economies including Pakistan and reported insignificant
effects of volatility on trade flows in the long run. For the same six countries, Bahmani-Oskooee (1996),
with Jahonsen and Juselius’ co-integration technique, recognized that exchange rate volatility would
depress the trade flows. Other studies like Doğanlar (2002), Arize et al. (2003) and Ozturk and Kalyoncu
(2009) also included Pakistan in their samples. The results of these studies suggested that the said relation
is negative for most of these countries, particularly for Pakistan.
The second group is much smaller and disaggregates Pakistan’s trade flows by partners in order to
reduce aggregation bias. The first study in this regard, by Kumar and Dhawan (1991), determined the
adverse impact of exchange rate volatility on the exports of Pakistan to each of its major partners.3
Likewise, Aqeel and Nishat (2006) found a negative relationship between Pakistan’s exports and
exchange rate volatility. However, in the case of imports of Pakistan, the effects of volatility were found
to be insignificant. Alam and Ahmad (2011), who also concentrated on Pakistan’s trade with its top
trading partners, failed to observe any noticeable effect of exchange rate volatility on imports of
Pakistan with top trading partners except the United Kingdom. Finally, Alam et al. (2017a) assessed the
effects of exchange rate volatility on the exports of Pakistan to the USA, UK, Japan, Saudi Arabia,
Germany and UAE. While they found adverse effects of exchange rate volatility on Pakistan’s exports
to USA, the effects were positive on Pakistan’s exports to Germany. These findings are somewhat
biased in that the exchange rate in the model and the volatility of that rate were based on the real
effective exchange rate of Pakistan, instead of the real bilateral exchange rate between Pakistan and
each trading partner.
Finally, a few studies have further disaggregated the data at the sectoral and commodity levels and
have discovered much significant impacts of exchange rate uncertainty on the trade flows of Pakistan.
The list includes Aftab et al. (2012), Bahmani-Oskooee et al. (2016), Bahmani-Oskooee et al. (2016),
and Alam et al. (2017b).
Studies reviewed above have a common feature in that they have assumed that the response of trade
flows to a measure of exchange rate volatility is symmetric. The symmetry assumption is based on the
logic that X per cent surge (reduction) in exchange rate volatility may reduce (enhance) the trade by Y
per cent. However, as argued by Bahmani-Oskooee and Aftab (2017), in the real world, traders may
respond differently to increasing or decreasing volatility, mostly due to the change in their expectation.
They may reduce the trade only by 5 per cent as a result of increased volatility, and on the other hand,
they can increase the trade by 10 per cent as a result of downward trend in volatility. The asymmetric
effects could also be due to price rigidity in domestic as well as international markets.
This research article is an effort in enhancing the literature in the field of international finance
with special reference to Pakistan and its top trading partner, China. We not only use commodity
trade flows between the two countries but also assess the possibility of asymmetric effects of the real
rupee–yuan volatility on those flows, a complete departure from the studies reviewed above. The
approach identifies Pakistan’s import and export industries that could be hurt by exchange rate
volatility and those that could benefit. To that end, we outline the models and discuss the methods in
the second section . The results are presented in the third section Results and Discussions, which is
followed by the fourth section . Finally, the definitions of variables and data sources are cited in the
appendix section.
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Models and Methods

In order to find the effect of volatility on commodity trade flows, many researchers have followed the
import and export models used by Bahmani-Oskooee and Hegerty (2009). Hence, for our empirical
analysis, we have constructed the following models proposed by former literature.

LnXti = α0 + α1LnYtCHN + α2LnVt + α3LnREXt + εt (1)

LnMti = β0 + β1LnYtPAK + β2LnVt + β3LnREXt + μt (2)

Equation (1) represents Pakistan’s export demand model where Xi is the real exports of commodity i
from Pakistan to China in a particular year t. It is assumed that it depends on the level of economic
activity in China (YCHN), the real rupee–yuan rate volatility (Vt) and the real rupee–yuan exchange rate
itself as a measure of relative prices (REXt). As far as the signs of coefficient estimates attached to these
variables are concerned, we expect an estimate of α1 to be positive if increased economic activity in
China leads to more Chinese imports (or Pakistan’s exports). However, if increased economic activity or
economic growth in China is due to an increase in the production of import-substitute goods, China
indeed may import less, resulting in a negative estimate of α1 (Bahmani-Oskooee, 1986). As discussed in
the previous section, since exchange rate volatility could affect trade in either direction, an estimate of
α2 can either be positive or negative. Finally, from Appendix A, we gather that the real exchange rate,
REXt, is defined in a way that an increase represents a real depreciation of the Pakistani rupee against the
yuan. Hence, we predict the estimate of α3 to be positive.
Equation (2) symbolizes the import demand model of Pakistan where Mi denotes Pakistan’s real
import of commodity i from China in a particular year. In model 2, import volume of commodity i is
assumed to depend on the level of economic activity in Pakistan (YPAK), the volatility measure of the real
rupee–yuan rate (V) and the real rupee–renminbi exchange rate itself. Following the same logic as above,
we expect an estimate of β1 to be positive and that of β2 to be positive or negative. Finally, since a
depreciation of the rupee is expected to reduce imports, we foresee an estimate of β3 to be negative.
Equations (1) and (2) are long-run models and can produce long-run estimates only, as most of the
researchers focussed only on long-run effects in the past. However, after the development of the
autoregressive distributed lag (ARDL) method by Pesaran et al. (2001), many studies tried to also assess
the short-run effects of exogenous variables on trade flows. The approach amounts to specify Equations
(1) and (2) in the error correction modelling format as follows:
n n n
LnX ti     t  k LnX ti k   t  k LnYt CHN
k  t  k LnVt  k 
k 1 k 0 k 0


k 0
t k LnREX t  k   1 LnX ti1   2 LnYt CHN
1   3 LnVt 1   4 LnREX t 1  t (3)

and
n n n
LnM ti      t k LnM ti k   t k LnYt PAK
k   t  k LnVt  k 

k 1 k 0 k 0

 
k 0
t k LnREX t  k  1 LnM ti1   2 LnYt PAK
1  3 LnVt 1   4 LnREX t 1  t (4)
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Bahmani-Oskooee et al. Global Business Review 24(3)5

The foremost advantage of the bounds testing approach by Pesaran et al. (2001) is that it gives the
short-run and long-run results in a single equation. In Equations (3 and 4), the short-run impacts are
reflected in the estimates attached to the first-differenced variables. The long-run effects in the export
demand model (3) are represented by the estimates of π2-π4 normalized on π1, and in the import demand
model (4) by the estimates of φ2–φ4 normalized on φ1. However, for long-run estimates to be authentic,
we need to check co-integration among the variables. To achieve that goal, Pesaran et al. (2001) suggested
applying the F-test to establish joint significance of lagged level variables. However, they recommended
new critical values for the F-test suitable for large samples, and Narayan (2005) tabulates the same for
small samples. These critical values account for the degree of integration of the variables in a given
model and could be used even if we have a combination of I(0) and I(1) variables; this is one of the main
advantages of this method.5 Therefore, there is no need for unit root pre-testing because most of the
macro variables are either I(0) or I(1). Nevertheless, we have executed the augmented Dickey–Fuller
(ADF) test of unit root to verify that no variable in our model is I(2).
The next step is to modify the above models so that we can also assess the asymmetric impact of
exchange rate volatility on trade flows. To that end, we follow Bahmani-Oskooee and Aftab (2017) in
general and Shin et al. (2014) in particular and decompose the volatility measure into two components,
one reflecting only increased volatility and the other one reflecting only the declines. This is done by the
means of partial sum approach as follows:
t t
POSt   max  LnV j , 0  and NEGt  min  LnV j , 0  (5)
j 1 j 1

where POS is the partial sum of positive changes and reflects increased volatility and NEG is the
partial sum of negative changes in volatility and reflects only the declines in volatility. Next, we replace
LnV in Equations (3) and (4) to arrive at:
n n n n
LnX ti     k LnX ti k   k LnYt CHN
k   k POSt  k  k NEGt  k 
k 1 k 0 k 0 k 0

 LnREX
k 0
k t k   1 LnX ti1   2 LnYt CHN
1   3 POSt 1   4 NEGt 1   5 LnREX t 1 t (6)

n n n n
LnM ti      k LnM ti k   'k LnYt PAK
k   'k POSt  k   'k NEGt  k
k 1 k 0 k 0 k 0

n
  'k LnREX t  k   '1 LnM ti1   '2 LnYt PAK
1   '3 POSt 1   '4 NEGt 1   '5 LnREX t 1  t
(7)
k 0

The above specifications (6 and 7) are commonly known as non-linear ARDL models due to the
nature of construction of partial sum variables. However, models (3) and (4) are known as linear ARDL
models. According to Shin et al. (2014), the methodology of linear ARDL suggested by Pesaran et al.
(2001) is equally applicable for the non-linear specifications (6 and 7). Also, the application of the
F-test with the same critical values as used in the linear model is valid for the non-linear model because
Shin et al. (2014) have treated both POS and NEG variables as one variable due to their dependency on
each other. However, after the estimation of the nonlinear models (6 and 7), we have to conduct a few
extra tests just to confirm the asymmetric effects of increased volatility versus decreased volatility in
each model.
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The first test is associated with confirming the presence of short-run adjustment asymmetry in each
non-linear model by checking the lag length (k) attached to the partial sum variables. If they are different,
we can confirm the presence of adjustment asymmetry. Next, we can also confirm the presence of short-
run asymmetric effects of exchange rate volatility by observing the size and sign of each coefficient
estimate attached to ∆POS and ∆NEG variables at a given lag order. However, if the Wald test rejects the
null hypothesis of  k  �  k in Equation (6) and  k    'k in Equation (7), short-run cumulative or
impact asymmetric effects will be confirmed. Finally, to explore the long-run asymmetry of positive and
negative volatility on trade movements, we will apply the Wald-test to determine if we can reject the null
   '3 '
of 3  4 in Equation (6) and that of  4 in Equation (7).6
 1  1  '1  '1

Results and Discussions

We are now in a position to estimate the linear and non-linear models so that we can make a comparison
between the symmetric and asymmetric impacts of exchange rate volatility on commodity trade flows
between Pakistan and China. For this purpose, annual data of 14 Pakistani export industries to China
and 34 Pakistani import industries from China over the period 1978–2018 have been utilized. These
are the only industries for which data were available. While trade value data of all industries come
from Word Integrated Trade System, price deflators come from International Financial Statistics. The
real exchange rate data are constructed using the cross-exchange rates of rupee and yuan against the
US dollar, and an increase reflects a real depreciation of the rupee. All data come from International
Financial Statistics. The real GDP data (denoted by Y in the models) for both countries also come from
the International Financial Statistics. For more details and definition of the volatility measure, see
Appendix A. Following previous research, we too impose a maximum of four lags on each first-
differenced variable and select the optimum number of lags using Akaike’s information criterion
(AIC). Since different estimates or diagnostic statistics are subject to different critical values, we
collect required critical values in the notes to each table and use them to indicate if an estimate is
significant or not.
To begin with, we focus on the estimates of the linear export demand model (3) first. For brevity, we
make the short-run estimates available upon request and provide a summary here by saying that the real
rupee–yuan volatility variable carried at least one significant coefficient estimate in 10 out of 14 exporting
industries.7 Nonetheless, long-run estimates of all the variables are reported in Table 1. As can be seen,
only in seven industries have the short-run effects lasted in the long run. In these seven industries, coded
as 26, 28, 29, 54, 66, 89 and 93, the LnV variable carries significant coefficient, and since all estimates
are negative, we conclude that increased exchange rate uncertainty will hurt Pakistan’s exports from
these industries to China, which implies reduced volatility will boost them. However, since co-integration
is supported either by the F-test or by the ECMt-1 or the t-test (Table 2) only in four industries (26, 28, 66
and 93), only the exports of these industries are affected by volatility or uncertainty. ECMt-1 is an
alternative test under which normalized long-run estimates and the long-run model (1) are used to
generate the error term. Denoting this error term ECMt, we move back to the error correction model (3)
and replace the linear combination of lagged level variables and estimate this new specification at the
same optimum lags. A significantly negative coefficient attached to ECMt-1 will support co-integration.
Banerjee et al. (1998), who introduced this test within the Engle–Granger approach, called this the t-test.
In almost all industries, it appears that the level of economic activity in China is the main determinant of
Pakistani exports.8
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Bahmani-Oskooee et al. Global Business Review 24(3)7

Table 1. Long-run Coefficient Estimates of Linear Export Demand Models

Coefficient Estimates
Industry Constant LnYCHN LnREX LnV
05—Fruits and vegetables (1.11%) –66.56 (6.62)** 3.03(5.51)** –6.03(1.31) –0.035(0.07)
26—Textile fibers (0.2%) 41.45(2.70)** –1.12(1.47) 0.69(0.13) –5.22(2.97)**
28—Metalliferous ores and scrap (7.46%) –22.06(2.61)** 0.82(1.85)* 4.70(1.80)* –2.91(2.85)**
29—Crude animal and vegetable material –7.097(0.43) 1.15(1.66)* –5.47(1.19) –3.82(2.24)**
(0.13%)
54—Medicinal and pharmaceutical products –9.51(1.99)** 0.48(1.72)* 3.09(1.24) –0.72(2.09)**
(0.01%)
61—Leather and leather manufacturer, n.e.s. –40.67(5.78)** 1.71(5.02)** 2.52(0.83) 0.51(0.99)
(2.45%)
65—Textile yarn, fabrics made up articles –25.53(0.51) 4.56(1.03) –37.43(0.53) –5.48(0.66)
(6.01%)
66—Non-metallic mineral manufacturers –59.92(26.70)** 1.68(15.21)** 8.65(1.096) –0.92(3.58)**
(0.1%)
69—Manufacturers of metal (0.24%) 44.42(6.75)** 1.26(4.08)** 7.63(3.34)** –0.99(1.47)
71—Machinery, other than electric (0.74%) –34.94(3.13)** 1.09(2.40)** 4.013(1.14) –0.54(0.88)
84—Clothing (3.50%) –37.32(14.67)** 1.85(15.76)** 0.37(0.52) –0.12(0.39)
86—Scientific and control instrument, –81.805(2.94)** 1.78(1.70)* 17.49(1.49) –1.36(0.95)
photographer (1.06%)
89—Miscellaneous manufactured articles –26.75(3.097)** 1.06(2.62)** 4.15(1.62) –1.15(1.68)*
(0.60%)
93—Special transaction not class accord 61.12(9.45)** –1.68(6.03)** 1.14(0.61) –1.996(3.19)
(0.001%)
Source: The authors.
Notes:
a. The coefficient estimate of each industry for every variable is given in front of each industry’s name, and the absolute value
of t-distribution for each estimate is present inside the parenthesis.
b. ** Signifies 5% level of significance; * signifies 10% level of significance.
c. The export share is given beside each industry’s name inside the parenthesis in the first column. It is calculated for each
industry as a percentage of sum of all export industries from Pakistan to China.
d. n.e.s. = Not elsewhere specified.

Table 2. Diagnostic Tests Associated with Linear Export Demand Models

Diagnostic Statistics
Industry ECMt–1 F–test LM RESET Adj. R2 CUSUM CUSUM2
05—Fruits and vegetables –0.58(2.89) 6.07** 0.03 0.15 0.909 S S
26—Textile fibres –0.584(4.20)** 5.48** 0.52 0.003 0.603 S S
28—Metalliferous ores and scrap –0.496(3.40) 4.22* 0.47 0.16 0.953 S S
29—Crude animal and vegetable –0.468(3.06) 2.76 1.85 3.72 0.795 S S
material
(Table 2 continued)
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(Table 2 continued)

Diagnostic Statistics
Industry ECMt–1 F–test LM RESET Adj. R2 CUSUM CUSUM2
54—Medicinal and pharmaceutical –0.855(2.65) 1.99 0.05 6.29 0.72 S S
products
61—Leather and leather –0.913(3.91)** 4.45* 1.58 13.36 0.83 S S
manufacturer, n.e.s
65—Textile yarn, fabrics made up –0.110(0.66) 3.56 1.77 5.06 0.958 S US
articles
66—Non-metallic mineral –1.42(5.41)** 9.69** 0.69 0.53 0.971 S US
manufacturers
69—Manufacturers of metal –1.03(4.36)** 5.36** 1.02 7.46 0.84 S S
71—Machinery, other than electric –0.58(4.08)** 4.19* 0.56 1.78 0.65 S S
84—Clothing –1.65(5.995)** 10.2** 0.003 0.767 0.964 S S
86—Scientific and control –0.23(1.87) 2.33 0.012 3.35 0.91 S S
instrument, photography
89—Miscellaneous manufactured –0.42(3.06) 3.54 0.64 2.03 0.95 S S
articles
93—Special transaction not class –2.03(5.42)** 7.91** 0.79 3.08 0.44 S S
accord
Source: The authors.
Notes:
a. As Pesaran et al.’s (2001) critical values of F-test are for large samples, due to our small sample size, we have used the
critical values (4.15 at 5% level and 5.01 at 10% level) presented by Narayan (2005).
b. The values inside the parenthesis in the second column are absolute t-distributions. For critical values of ECMt-1, once
again due to a small sample such as ours, we have relied upon the critical values (-3.46 at 10% level and -3.91 at 5% level)
given by Banerjee et al. (1998, p. 276).
c. As the LM and RESET tests are distributed at χ2 with one degree of freedom, their critical value is 3.84 at 10 per cent
level.
d. ** Implies 5% level of significance and * implies 10% level of significance.

Following the same approach, we estimate and report only the long-run estimates for each of the 34
Pakistani importing industries in Tables 3 and 4. Once again, the short-run results that are available upon
request revealed that the volatility measure carried at least one lagged significant coefficient in 19 industries.9
However, from Table 3, we gather that short-run estimates continued as long-run significant and meaningful
(co-integrated) estimates in 10 industries coded as 05, 51, 54, 61, 62, 63, 66, 69, 82 and 86. While in 05, 61,
62, 63 and 66 the effects are negative, in the remaining five industries they are positive.10 Again, it appears
that in most importing industries, the level of economic activity in Pakistan is the main long-run determinant.

Table 3. Long-run Coefficient Estimates of Linear Import Demand Models

Coefficient Estimates
Industry Constant LnYPAK LnREX LnVEX
05—Fruits and vegteables (0.66%) –22.76(1.67)* 1.70(2.57)** –2.19(1.15) –2.16(3.12)**
06—Sugar, sugar preparations and honey (0.09%) 33.61(0.60) –0.69(0.25) –2.02(0.24) –1.73(1.08)

(Table 3 continued)
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(Table 3 continued)

Coefficient Estimates
Industry Constant LnYPAK LnREX LnVEX
07—Coffee, tea, cocoa, spices and manufacturer –2.60(0.27) 0.08(0.17) 6.33(2.86)** –0.26(0.86)
(0.04%)
09—Micellaneous food preparations (0.04%) –122.72(5.58)** 5.03(4.69)** 2.42(0.68) 0.19(0.37)
23—Crude rubbers including synthetic (0.02%) –18.28(3.45)** 1.40(5.51)** –1.18(1.53) 0.53(3.19)**
26—Textile fibres not manufactured (1.26%) –65.77(2.87)** 1.09(0.91) 2.81(3.39)** –0.29(0.45)
27—Crude fertilizers and crude mineral (0.05%) 2.27(0.48) 0.48(2.24)** 0.17(0.25) 0.04(0.17)
28—Metalliferous ores and metal scrap (0.03%) –53.21(4.86)** 2.62(5.35)** –0.62(0.39) 0.20(0.66)
33—Petroleum and petrroleum products (0.09%) –50.02(2.37)** 1.65(1.78)* 7.15(2.11)** –0.54(1.02)
43—Animal and vegtebale oils and fats (0.01%) 15.99(0.77) 0.52(0.514) 4.10(0.84) 0.54(0.73)
51—Chemical elements and compounds (5.15%) –34.78(15.37)** 2.13(19.91)** –0.099(0.31) 0.39(4.05)**
53—Dyeing, tanning and colouring material –18.06(6.51)** 1.44(11.29)** –0.37(0.85) 0.003(0.04)
(1.02%)
54—Medicinal and pharmaceutical products –34.08(5.69)** 2.26(7.64)** –2.14(2.68)** 0.54(2.88)**
(1.22%)
55—Perfume materials, toilet and cleansing –60.71(5.33)** 2.69(4.42)** 3.3007(1.28) –0.02(0.07)
(0.33%)
58—Plastic materials (3.69%) –114.27(4.54)** 5.48(4.84)** –3.54(1.73)* 0.70(1.19)
59—Chemical minerals (1.34%) –36.76(0.75) 3.97(1.02) –18.48(0.76) –0.04(0.02)
61—Leather, leather manfacturers, n.e.s. (0.01%) 5.29(0.21) 0.48(0.41) –1.74(0.56) –2.698(2.32)**
62—Rubber manufacturer (1.59%) –39.43(49.34)** 2.09(54.77)** 1.26(11.26)** –0.202(4.67)**
63—Wood and cork manufacturer (0.14%) –73.27(7.15)** 2.898(5.57)** 5.23(3.09)** –1.34(2.21)**
64—Paper, paper board and manufacturers 39.63(0.32) –6.82(0.52) 55.09(0.65) –16.04(0.63)
(1.25%)
65—Textile yarn, fabrics made up articles (8.05%) –31.65(0.37) 2.35(0.66) –6.33(0.34) –3.27(0.61)
66—Non-metallic mineral manufacturers (2.063%) –38.44(7.63)** 1.84(7.22)** 3.29(4.46)** –0.75(2.96)**
67—Iron and steel (8.25%) –123.90(2.73)** 5.73(2.93)** 2.77(0.86) –0.21(0.397)
68—Non-ferous metals (1.18%) –69.32(4.90)** 3.26(4.73)** 0.82(0.36) –0.015(0.02)
69—Manufacturers of metal, n.e.s (3.35%) –100.26(1.90)* 4.87(2.34)** –3.02(1.40) 1.42(1.92)*
71—Macinery other than electrics (24.0%) –50.77(9.69)** 2.95(12.66)** –2.18(2.84)** 0.23(1.60)
72—Electrical machinery apparatus (21.27%) –72.52(7.30)** 3.55(8.14)** 0.21(0.153) 0.31(1.16)
73—Transport equipment (4.55%) –74.07(11.94)** 3.40(11.33)** 1.76(1.97)** –0.21(0.64)
81—Sanitary, plumbing, heating and lighting –32.89(2.27)** 1.35(1.82)* 5.35(2.63)** –1.12(1.36)
(0.28%)
82—Furniture (0.25%) 113.39(6.99)** 3.79(4.63)** 11.23(3.58)** 0.799(1.82)*
84—Clothing (0.88%) –120.38(7.97)** 4.61(5.88)** 6.99(2.48)** –0.48(0.69)**

(Table 3 continued)
Bahmani-Oskooee
10 et al. 519
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(Table 3 continued)

Coefficient Estimates
Industry Constant LnYPAK LnREX LnVEX
86—Scientific and control instrument, –44.05(9.61)** 2.44(11.21)** –0.15(0.24) 0.48(2.07)**
photography (1.24%)
89—Miscellaneous manufactured articles (1.50%) –47.17(3.18)** 2.53(3.76)** –0.54(0.21) –1.008(1.21)
93—Special transaction not class accord (0.07%) –63.27(5.28)** 3.73(6.49)** –7.45(3.49)** –0.19(0.54)
Source: The authors.
Notes:
a. The coefficient estimate of each industry for every variable is given in front of each industry’s name, and the absolute value
of t-distribution for each estimate is present inside the parenthesis.
b. ** Signifies 5% level of significance; * signifies 10% level of significance.
c. Import share is given beside each industry’s name inside the parenthesis in the first column. It is calculated for each
industry as a percentage of the sum of all industries in Pakistan importing from China.
d. n.e.s. = Not elsewhere specified.

Table 4. Diagnostic Statistics Associated with the Linear Import Demand Models

Diagnostic Statistics
Adj.
Industry ECMt–1 F–test LM RESET R2 CUSUM CUSUM2
05—Fruits and vegteables –0.878(4.85)** 6.69** 2.11 16.62 0.78 S S
06—Sugar, sugar preparations and honey –0.52(2.06) 1.36 0.77 3.47 0.42 S US
07—Coffee, tea, cocoa, spices and –0.42(3.55)* 6.78** 0.25 1.63 0.77 S S
manufacturer
09—Micellaneous food preparations –0.43(2.44) 2.71 0.93 0.1 0.91 S US
23—Crude rubbers including synthetic –1.21(3.45) 1.96 2.12 0.39 0.68 S S
26—Textile fibres not manufactured –0.38(3.49) 6.62** 7.79 0.63 0.89 S S
27—Crude fertilizers and crude mineral –0.87(3.60)* 4.08 3.67 0.06 0.28 S S
28—Metalliferous ores and metal scrap –0.83(5.30)** 7.63** 0.13 0.006 0.59 S S
33—Petroleum and petrroleum products –0.26(1.76) 4.65* 0.031 0.047 0.68 S S
43—Animal and vegtebale oils and fats –0.25(2.14) 2.41 0.37 1.54 0.58 S US
51—Chemical elements and compounds –0.89(4.78)** 6.91** 0.02 1.17 0.98 S S
53—Dyeing, tanning and colouring material –0.56(3.75)* 4.63* 1.02 0.83 0.96 S S
54—Medicinal and pharmaceutical –0.73(3.88)* 6.96** 0.78 12.35 0.956 S S
products
55—Perfume Materials, toilet and cleansing –0.52(3.37) 7.35** 2.17 1.42 0.923 S S
58—Plastic materials –0.36(2.83) 7.14** 0.02 4.59 0.96 S S
59—Chemical minerals –0.083(0.93) 3.42 0.003 12.92 0.97 S S
61—Leather, leather manfacturers, n.e.s. –0.58(4.04)** 5.76** 0.55 2.56 0.79 S S
62—Rubber manufacturer –2.49(9.06)** 28.74** 0.114 6.57 0.99 S S
63—Wood and cork manufacturer –1.01(5.08)** 8.19** 0.05 0.07 0.903 S S
64—Paper, paper board and manufacturers –0.03(0.67) 6.2** 0.95 0.004 0.95 S S

(Table 4 continued)
520 Global Business Review 24(3)
Bahmani-Oskooee et al. 11

(Table 4 continued)

Diagnostic Statistics
Adj.
Industry ECMt–1 F–test LM RESET R2 CUSUM CUSUM2
65—Textile yarn, fabrics made up articles –0.98(0.99) 1.63 2.16 8.26 0.97 S S
66—Non-metallic mineral manufacturers –0.71(5.43)** 8.08** 3.55 0.16 0.98 S S
67—Iron and steel –0.27(1.71) 4.88* 0.156 0.45 0.96 S S
68—Non-ferous metals –0.44(2.45) 1.96 2.09 0.06 0.92 S S
69—Manufacturers of metal, n.e.s. –0.299(1.53) 6.28** 2.39 0.36 0.95 S S
71—Macinery other than electrics –0.55(4.11)** 3.95 0.012 0.015 0.953 S US
72—Electrical machinery apparatus –0.40(3.34) 3.2 0.58 0.07 0.952 S S
73—Transport equipment –0.89(5.13)** 7.05** 11.79 7.81 0.97 S S
81—Sanitary, plumbing, heating and lighting –0.35(2.87) 3.19 1.36 0.68 0.956 S S
82—Furniture –0.33(3.97)* 3.797 0.012 3.6 0.975 S S
84—Clothing –0.35(3.04) 2.76 3.16 0.19 0.98 S S
86—Scientific and control instrument, –0.78(5.29)** 7.81** 3.83 0.27 0.94 S S
photography
89—Miscellaneous manufactured articles –0.29(2.03) 2.08 0.51 7.63 0.971 S S
93—Special transaction not class accord –1.4(7.77)** 14.53** 0.88 0.41 0.49 S S
Source: The authors.
Notes:
a. As the Pesaran et al.’s (2001) critical values of F-test are for large samples, due to our small sample size, we have used the
critical values (4.15 at 5% level and 5.01 at 10% level) presented by Narayan (2005).
b. The values inside the parenthesis in the second column are absolute t-distributions. For critical values of ECMt-1, once
again due to a small sample such as ours, we have relied upon the critical values (-3.46 at 10% level and -3.91 at 5% level)
given by Banerjee et al. (1998, p. 276).
c. As the LM and RESET statistics are distributed at χ2 with one degree of freedom, their critical value is 3.84 at 10 per cent
level.
d. ** Implies 5% level of significance and * implies 10% level of significance.
e. n.e.s. = Not elsewhere specified.

In order to see how the results change if we introduce non-linear adjustment of the volatility measure,
we shift to the estimates of the non-linear models. Again, we begin with the estimates of non-linear
export demand models that are reported in Tables 5–7. From the short-run estimates reported in Table 5,
we gather that either ∆POS or ∆NEG carries at least one significant lagged coefficient in all industries
except in 86. The increase from 10 linear models to 13 non-linear models in which we find significant
short-run effects must be attributed to the non-linear adjustment of exchange rate volatility. Furthermore,
at any given lag k, the estimate attached to ∆POSt-k is different from the estimate attached to ∆NEGt-k for
most k’s, supporting short-run asymmetric effects of rupee–yuan volatility on Pakistan’s exports to
China. However, the sum of the coefficients attached to ∆POS is different from the sum attached to
∆NEG in only seven industries coded as 05, 26, 29, 54, 61, 86, and 93. In these industries the Wald-test
reported as Wald-S in Table 7 is significant, supporting short-run cumulative or impact asymmetric
effects of volatility.11
Table 5. Short-Run Coefficient Estimates of Non-linear Export Demand Models

Coefficient Estimates
Industry ΔPOSt ΔPOSt–1 ΔPOSt–2 ΔPOSt–3 ΔNEGt ΔNEGt–1 ΔNEGt–2 ΔNEGt–3
05—Fruits and vegetables –0.308(0.96) 0.703(1.91)* 1.16(4.25) –1.18(1.59)
26—Textile fibres –1.88(2.97)** 1.18(1.86)* 2.04(2.88)** 2.101(2.83)** –3.893(3.64)** 2.407(2.74)** 1.897(2.08)** –0.58(0.86)
28—Metalliferous ores and –0.49(2.89)** 0.292(1.49) 0.218(1.13) 0.267(1.43) 0.274(0.91) –0.382(1.34) 0.285(1.015) 0.398(2.13)**
scrap
29—Crude animal and vegetable 1.09(2.81)** –0.184(0.45) 0.595(1.56) 2.373(5.17)** 1.72(2.76)**
material
54—Medicinal and 0.016(0.02) 0.87(1.54) 0.504(0.974) –0.736(2.02)** –1.29(1.69)* 0.956(1.15)
pharmaceutical products
61—Leather and leather –1.297(3.45)** 0.51(1.095) 0.36(0.78) –0.78(2.29)** 1.45(2.596)** 0.390(0.62) –1.479(2.46)** 1.150(2.89)**
manufacturer, n.e.s.
65—Textile yarn, fabrics made 0.137(0.67) –1.634(5.14)**
up articles
66—Non–metallic mineral –0.62(1.95)* 1.24(3.38)** –1.064(1.88)* 0.042(0.094) –0.035(0.08) 0.52(1.38)
manufacturers
69—Manufacturers of metal 0.831(1.88)* 0.219(0.45) 0.09(0.183) 0.78(1.82)* 1.66(2.52)** 1.314(2.03)** 0.97(1.32) –0.82(1.80)*
71—Machinery, other than –0.864(1.614) –0.726(1.15) 1.29(2.22)** –1.002(1.796)* 0.408(0.489) 2.284(2.48)** –2.63(3.14)**
electric
84—Clothing –0.051(0.21) 0.372(1.18) –0.03(0.13) 0.398(2.02)** 1.525(3.74)** –0.001(0.006) 0.841(2.85)**
86—Scientific and control –0.48(1.52) –0.176(0.383)
instrument, photography
89—Miscellaneous –0.305(1.49) 0.365(1.16) 0.46(2.05)**
manufactured articles
93—Special transaction not 0.606(0.76) –0.66(0.58) 0.117(0.132) 4.39(4.71)** –1.34(1.71)*
class accord
Source: The authors.
Notes:
a. The coefficient estimate of each industry for every variable is given in front of each industry’s name, and the absolute value of t-distribution for each estimate is present
inside the parenthesis.
b. ** Signifies 5% level of significance; * signifies 10% level of significance.
c. n.e.s. = Not elsewhere specified.
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13

Table 6. Long-Run Coefficient Estimates of Non-linear Export Demand Models

Coefficient Estimates
Industry Constant LnY CHN
LnREX NEG POS
05—Fruits and vegetables –2267.38(0.156) 88.84(0.16) 3.61(0.05) 84.05(0.15) 56.59(0.15)
26—Textile fibres 247.20(1.66)* –9.80(1.56) 11.09(1.42) –12.91(2.88)** –10.63(3.12)**
28—Metalliferous ores and –160.92(5.51)** 6.74(5.79)** –1.74(1.51) –0.28(0.54) –1.90(4.38)**
scrap
29—Crude animal and 169.38(13.33)** –6.06(12.31)** –1.07(1.71)* –1.97(11.78)** 0.44(3.54)**
vegetable material
54—Medicinal and 110.87(0.76) –4.22(0.72) 4.32(0.48) –1.197(0.60) 0.27(0.14)
pharmaceutical products
61—Leather and leather 12.40(0.35) –0.51(0.37) 4.95(2.77)** 0.04(0.05) 0.63(0.92)
manufacturer, n.e.s.
65—Textile yarn, fabrics made 1983.90(0.36) –74.79(0.35) –19.42(0.26) –28.08(0.37) –2.97(0.310)
up articles
66—Non-metallic mineral –56.27(1.73)* 1.64(1.23) 8.01(6.66)** –1.04(2.02)** –1.01(4.42)**
manufacturers
69—Manufacturers of metal –27.37(0.401) 0.145(0.05) 12.95(3.07)** –0.92(0.63) –0.72(0.59)
71—Machinery, other than –276.25(5.02)** 11.02(4.88)** –3.30(1.05) 1.96(1.64)* –0.93(0.86)
electric
84—Clothing –68.98(4.98)** 3.19(5.57)** –0.99(1.56) 0.47(1.84)* 0.095(0.48)
86—Scientific and control –266.70(7.20)** 10.20(6.63)** 3.18(1.44) 1.52(3.57)** –0.98(2.37)**
instrument, photography
89—Miscellaneous 111.37(0.61) –4.60(0.60) 10.66(0.998) –1.181(0.82) 0.28(0.210)
manufactured articles
93—Special transaction not 83.66(2.29)** –2.68(1.81)* 0.65(0.33) –0.92(1.75)* –0.598(1.42)
class accord
Source: The authors.
Notes:
a. The coefficient estimate of each industry for every variable is given in front of each industry’s name, and the absolute value
of t-distribution for each estimate is present inside the parenthesis.
b. ** Signifies 5% level of significance; * signifies 10% level of significance.
c. n.e.s. = Not elsewhere specified

In order to see in how many industries the short-run asymmetric effects persist in the long run, we
consider the long-run estimates in Table 6. As can be seen, either the POS or the NEG variable carries a
significant coefficient in eight industries coded 26, 28, 29, 66, 71, 84, 86 and 93. These estimates are
meaningful since asymmetry co-integration is supported either by the F-test or the t-test (Table 7). Again,
the increase from four industries in Table 1 to eight in Table 6 must be attributed to the non-linear
adjustment of the volatility measure. Clearly, the findings are industry-specific. For example, consider the
largest exporting industry coded as 28, that is, Metalliferous Ores and Scrap, with 7.46 per cent share of
exports. The estimates of the linear model in Table 1 revealed that increased volatility will hurt the exports
of this industry and decreased volatility will boost them. However, the estimates of the non-linear model
associated with this industry in Table 7 reveal that while increased volatility will hurt the exports of this
Bahmani-Oskooee
14 et al. 523
Global Business Review

industry, decreased volatility will have no long-run effects. Similarly, in the second largest exporting
industry, 84 (Clothing, with 3.5% exports share), volatility had no long-run effects on the exports of this
industry in Table 1. However, from Table 7, it is clear that while decreased volatility reduces exports of
this industry, increased volatility has no long-run effects, a clear sign of long-run asymmetric effects
which is also supported by the Wald test reported as Wald-L in Table 7. Indeed, significant long-run
asymmetric effects are supported by the Wald-L in five industries including the largest industry, 28.

Table 7. Diagnostic Statistics Associated with the Non-linear Export Demand Models

Diagnostic Statistics
Adj.
Industry ECMt–1 F–test LM Reset R2 Wald–L Wald–S CUSUM CUSUM2
05—Fruits and vegetables –0.04(0.15) 9.52** 0.013 3.44 0.94 0.02 13.46** S S
26—Textile fibers –0.73(3.51) 6.14** 2.59 1.08 0.696 1.78 6.48** S S
28—Metalliferous ores and –0.70(4.32)** 5.54** 0.42 0.93 0.96 19.4** 0.033 S S
scrap
29—Crude animal and –2.45(6.45)** 5.34** 1.05 0.02 0.92 25.2** 10.51** S US
vegetable material
54—Medicinal and –0.52(0.94) 1.02 1.99 8.84 0.72 0.66 4.62** US US
pharmaceutical products
61—Leather and leather –1.05(5.56)** 9.26** 6.71 43.27 0.92 2.02 8.48** S S
manufacturer, n.e.s.
65—Textile yarn, fabrics –0.05(0.37) 3.61 0.03 2.89 0.97 0.14 0.93 S US
made up articles
66—Non–metallic mineral –1.95(3.50) 5.67** 1.28 0.06 0.96 0.005 0.03 US S
manufacturers
69—Manufacturers of metal –0.67(3.88)* 4.19* 0.001 10.3 0.895 0.06 1.23 S S
71—Machinery, other than –1.14(3.68)* 3.04 4.68 0.41 0.78 19.6** 0.33 S S
electric
84—Clothing –2.09(7.23)** 12.11** 10.88 0.67 0.98 5.05** 0.102 S S
86—Scientific and control –0.91(5.11)** 7.106** 1.69 9.58 0.946 31.43** 5.68** S S
instrument, photography
89—Miscellaneous –0.228(1.00) 2.93 1.21 0.03 0.95 0.6 1.14 S S
manufactured articles
93—Special transaction not –2.18(5.46)** 0.84 0.16 2.63 0.61 0.51 11.41** S S
class accord
Source: The authors.
Notes:
a. Since Shin et al. (2014) have treated both POS and NEG as one variable, therefore, we can use the same critical values
of F-test which come from Pesaran et al. (2001). However, they are for large samples; hence, we have used the critical
values (4.15 at 5% level and 5.01 at 10% level) presented by Narayan (2005) which suit a small sample size like ours.
b. The values inside the parenthesis in the second column are absolute t-ratios. For critical values of ECMt–1, once again due
to a small sample size such as ours, we have relied upon the critical values (-3.68 at 10% level and -4.18 at 5% level), when
k = 4, given by Banerjee et al. (1998, p. 276).
c. As the LM and RESET statistics are distributed at χ2 with one degree of freedom, their critical value is 2.77 at the 10% and
3.84 at the 5% level.
d. ** Implies 5% level of significance and * implies 10% level of significance.
e. Both Wald tests are also distributed at χ2 with one degree of freedom. Their critical values are 2.77 at the 10% and 3.84
at the 5% level.
Table 8. Short-Run Coefficient Estimates of Non-linear Import Demand Models
Coefficient Estimates
Industry ΔPOSt ΔPOSt–1 ΔPOSt–2 ΔPOSt–3 ΔNEGt ΔNEGt–1 ΔNEGt–2 ΔNEGt–3
05—Fruits and vegetables –0.50(1.17) 0.64(1.20) 0.31(0.74) 0.53(1.19) –1.04(1.32) –0.18(0.27) –0.12(0.21) 1.04(2.15)**
06—Sugar, sugar –0.77(0.81) 0.71(0.66) –2.77(3.02)** 2.21(2.61) –1.69(1.04) –1.27(0.94) 1.38(0.99) –2.07(2.16)**
preparations and honey
07—Coffee, tea, cocoa, 0.13(0.80) 0.07(0.39) 0.36(2.33)** –0.165(1.14) –0.82(2.72)** 0.04(0.18) –0.68(3.06)**
spices and manufacturing
09—Micellaneous food –0.03(0.10) 0.48(1.016)
preparations
23—Crude rubbers 0.40(2.15)** 0.65(2.49)** 0.31(1.14) –0.35(1.28) –0.53(2.33)**
including synthetic
26—Textile fibers not –0.52(1.51) 0.48(1.62) –0.49(1.44) 0.55(1.77)* 0.93(1.44)
manufactured
27—Crude fertilizers and 0.16(1.85)* –0.29(3.16)** –0.32(1.96)** –0.12(1.07) –0.21(1.98)**
crude mineral
28—Metalliferous ores –0.01(0.04) 0.11(0.37) 0.62(2.096)** 0.001(0.003)
and metal scrap
33—Petroleum and –0.17(1.26) 0.004(0.03) –0.24(1.77)* 0.015(0.08) –0.38(1.78)* 0.02(0.13) –0.52(3.52)**
petroleum products
43—Animal and vegetable 0.15(0.49) –0.72(1.66)* –0.30(0.97) 0.47(2.01)** 0.02(0.03) –0.77(1.62)
oils and fats
51—Chemical elements 0.09(1.76)* –0.05(0.91) –0.09(1.90)* –0.05(0.65) –0.208(3.06)** –0.211(3.39)**
and compounds
53—Dyeing, tanning and –0.062(0.80) 0.04(0.42) –0.07(0.92) –0.123(1.61) 0.106(0.698) 0.08(0.513) –0.391(2.92)**
coloring material
54—Medicinal and –0.154(2.47)** –0.013(0.13) –0.12(1.53) –0.19(2.64)** 0.346(6.02)**
pharmaceutical products
55—Perfume materials, –0.052(0.25) 0.703(2.93)** –0.246(0.45) –0.481(1.76)* 0.145(0.581) 0.294(1.264)
toilet and cleansing
58—Plastic materials –0.337(2.67)** –0.851(5.481)** 0.037(0.32) 0.097(1.13) 0.46(2.18)** 0.30(1.58)
59—Chemical minerals 0.054(0.45) –0.104(0.738) 0.137(0.838) 0.195(1.64)* 0.35(1.58) –0.105(0.42) 0.079(0.435) 0.515(3.86)**
61—Leather, leather 0.19(0.384) –1.311(1.707)* –1.32(1.63)
manufacturers, n.e.s
(Table 8 continued)
(Table 8 continued)
Coefficient Estimates
Industry ΔPOSt ΔPOSt–1 ΔPOSt–2 ΔPOSt–3 ΔNEGt ΔNEGt–1 ΔNEGt–2 ΔNEGt–3
62—Rubber manufacturer –0.155(2.07)** 0.14(1.67)* 0.056(0.72) 0.252(4.04)** –0.098(0.55) 0.090(0.57) 0.53(0.44) 0.141(1.71)*
63—Wood and cork 0.530(2.499)** 1.97(5.99)** 1.615(3.15)** 0.287(1.25) –0.776(1.33) 2.22(2.706)** 0.478(1.456) 0.679(1.877)*
manufacturer
64—Paper, paper board 0.122(1.015) 0.372(2.92)** 0.241(1.924)* 0.166(1.42) –0.527(2.494)** 0.618(2.78)**
and manufacturers
65—Textile yarn, fabrics –0.213(0.893) –0.616(2.41)** 0.376(1.48) 0.801(3.12)** 0.66(1.47)
made up articles
66—Non–metallic mineral 0.03(0.28) 0.076(0.698) 0.140(1.43) 0.179(1.06) 0.348(1.62) –0.13(1.14) 0.505(5.030)**
manufacturers
67—Iron and steel –0.095(0.87) 0.25(1.63)
68—Non–ferous metals –0.223(1.354) –0.95(3.517)** –0.74(3.02)**
69—Manufacturers of 0.028(0.211) –0.075(0.484) –0.33(2.309)** –0.271(1.099) –0.1819(0.76) –0.290(1.76)* –0.35(2.11)**
metal, n.e.s.
71—Macinery other than 0.109(0.83) 0.456(2.88)** –0.43(3.22)** 0.287(2.21)** –0.01(0.04) –0.71(3.23)** –0.31(1.53)
electrics
72—Electrical machinery –0.05(0.404) 0.252(2.16)** 0.23(1.35)
apparatus
73—Transport equipment –0.63(3.501)** 0.479(1.468) 0.271(1.006) –0.36(1.76)** 0.481(2.67)**
81—Sanitary, plumbing, 0.324(2.699)** –0.368(2.05)** –0.009(0.06) 0.325(2.14)** 0.86(5.74)**
heating and lighting
82—Furniture –0.393(2.013) –0.0998(0.47)
84—Clothing –0.087(0.52) –0.093(0.526)
86—Scientific and control 0.173(1.95)* 0.164(1.68)* –0.399(4.73)** 0.258(1.773)* –0.518(3.92)**
instrument, photography
89—Miscellaneous 0.020(0.153) 0.107(0.67) 0.058(0.394) 0.183(1.48) 0.389(1.91)* –0.138(0.588) 0.101(0.47) 0.41(2.84)**
manufactured articles
93—Special transaction –0.843(1.089) 1.033(1.20) –2.34(2.90)** 0.857(0.74) 0.112(0.099) 1.94(2.14)** –1.43(1.81)*
not class accord
Source: The authors.
Notes:
a. The coefficient estimate of each industry for every variable is given in front of each industry’s name, and the absolute value of t-distribution for each estimate is present
Bahmani-Oskooee et al. 17
inside the parenthesis.
b. ** Signifies 5% level of significance; * signifies 10% level of significance.
c. n.e.s. = Not elsewhere specified.
Finally, we consider the estimates of Pakistan’s non-linear import demand models that are reported in
Tables 8–10. From the short-run estimates in Table 8, since either the ΔPOS or the ΔNEG variable carries
at least one lagged significant coefficient in 30 industries, we can safely conclude that changes in
Bahmani-Oskooee et al. 17
526 Global Business Review 24(3)
c. n.e.s. = Not elsewhere specified.
Finally, we consider the estimates of Pakistan’s non-linear import demand models that are reported in
Tables 8–10. From the short-run estimates in Table 8, since either the ΔPOS or the ΔNEG variable carries
at least one lagged significant coefficient in 30 industries, we can safely conclude that changes in
exchange rate volatility have significant short-run effects on Pakistan’s imports from China. Again, the
increase from 18 industries from linear models to 30 industries from non-linear models must be attributed
to the non-linear adjustment of exchange rate volatility. Furthermore, at any given lag order j, the estimate
attached to ΔPOSt-j is different to the one attached to ΔNEGt-j, supporting short-run asymmetric effects
of volatility on imports. However, short-run cumulative or impact asymmetric effects are verified only
in 13 industries coded 07, 23, 43, 51, 53, 54, 58, 63, 64, 66, 68, 81 and 82. In these importing industries,
the Wald-S test that is reported in diagnostics Table 10 is significant.

Table 9. Long-Run Coefficient Estimates of Non-linear Import Demand Models

Coefficient Estimates
Industry Constant LnY PAK
LnREX NEG POS
05—Fruits and vegteables 229.46(2.35)** –8.52(2.14)** 3.43(1.96)** –3.15(3.64)** –1.61(2.90)**
06—Sugar, sugar preparations –291.02(0.57) 10.79(0.52) 11.06(0.70) –1.32(0.279) –2.87(0.84)
and honey
07—Coffee, tea, cocoa, spices 339.20(1.08) –13.91(1.07) 3.21(1.69)* –2.42(1.34) 0.09(0.89)
and manufacturer
09—Micellaneous food –310.98(1.67)* 12.83(1.66)* 1.89(0.51) 1.06(1.09) –0.07(0.104)
preparations
23—Crude rubbers including –84.91(2.10)** 4.13(2.49)** –1.77(2.13)** 0.63(2.75)** 0.30(2.02)**
synthetic
26—Textile fibres not –483.77(2.64)** 18.47(2.46)** 20.88(5.11)** 1.52(1.42) –1.07(0.97)
manufactured
27—Crude fertilizers and crude –24.13(1.49) 1.70(2.57)** –1.58(3.40)** 0.25(2.18)** 0.16(1.66)*
mineral
28—Metalliferous ores and –136.82(1.54) 5.81(1.59) 1.40(0.73) –0.001(0.002) –0.53(0.94)
metal scrap
33—Petroleum and petrroleum –289.65(2.93)** 12.18(3.08)* 1.93(1.09) 1.71(2.47)** 0.19(0.40)
products
43—Animal and vegtebale oils –349.35(2.94)** 15.05(3.09)** –2.35(1.20) 2.30(2.78)** 0.27(0.48)
and fats
51—Chemical elements and –19.26(1.25) 1.47(2.31)** –0.18(0.95) 0.25(2.93)** 0.36(4.97)**
compounds
53—Dyeing, tanning and 16.98(0.81) 0.05(0.06) –1.13(3.51) 0.04(0.28) 0.29(3.06)**
colouring material
54—Medicinal and –21.80(0.49) 1.71(0.92) –1.70(2.53)** 0.46(1.75)* 0.49(2.79)**
pharmaceutical products
55—Perfume materials, toilet –25.87(0.18) 0.64(0.10) 10.83(1.31) –1.41(1.05) –1.49(1.42)
and cleansing
(Table 9 continued)
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18 et al. 527
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(Table 9 continued)

Coefficient Estimates
Industry Constant LnY PAK
LnREX NEG POS
58—Plastic materials –336.05(4.11)** 14.26(4.22)** 1.55(1.32) 2.24(4.42)** 0.697(2.06)**
59—Chemical minerals 194.60(0.73) –6.88(0.61) –2.38(0.30) –0.64(0.32) 0.46(0.34)
61—Leather, leather 313.75(1.10) –11.95(1.01) –5.59(1.33) –3.83(2.63)** –1.78(1.92)**
manfacturers, n.e.s.
62—Rubber manufacturer –55.21(3.84)** 2.75(4.63)** 1.106(6.39)** –0.14(1.36) –0.23(3.93)**
63—Wood and cork 741.02(4.66)** –30.75(4.66)** 6.57(5.65)** –7.19(6.44)** –2.33(6.75)**
manufacturer
64—Paper, paper board and 3087.13(0.77) –134.76(0.78) 78.18(0.93) –31.68(0.86) –13.14(0.94)
manufacturers
65—Textile yarn, fabrics made –645.88(4.26)** 26.13(4.15)** 8.53(3.74)** 1.92(2.04)** –1.43(2.68)**
up articles
66—Non-metallic mineral 596.25(2.21)** –24.35(2.18)** 6.24(2.77)** –3.32(2.68)** 0.32(0.61)
manufacturers
67—Iron and steel –248.26(2.67)** 10.78(2.81)** –0.15(0.08) 0.78(1.76)* –0.30(0.82)
68—Non-ferous metals –9.81(0.06) 0.99(0.15) –2.42(0.76) –1.12(0.83) –0.65(1.05)
69—Manufacturers of metal, –124.41(1.13) 5.85(1.29) –3.64(1.64)* 1.27(2.15)** 1.12(1.77)*
n.e.s.
71—Macinery other than –18.69(0.27) 1.71(0.59) –3.37(3.59)** –0.17(0.31) 0.05(0.14)
electrics
72—Electrical machinery –215.57(5.54)** 9.45(5.94)** –0.13(0.16) 0.34(1.40) –0.52(2.195)**
apparatus
73—Transport equipment –91.68(1.16) 4.15(1.26) 2.26(1.99)** 0.09(0.23) –0.07(0.35)
81—Sanitary, plumbing, heating –595.74(4.49)** 24.46(4.57)** 3.497(4.05)** 2.79(3.92)** –0.28(1.31)
and lighting
82—Furniture –239.66(2.17)** 9.03(1.98)** 10.82(4.11)** –0.26(0.45) –1.02(2.40)**
84—Clothing –117.51(1.15) 4.50(1.08) 6.99(2.398)** –0.27(0.51) –0.252(0.550)
86—Scientific and control –72.75(4.08)** 3.68(5.02)** –0.992(2.92)** 0.67(5.02)** 0.52(4.41)**
instrument, photography
89—Miscellaneous manufactured 119.12(1.12) –4.35(0.99) 1.63(0.803) –1.29(1.50) –0.41(0.59)
articles
93—Special transaction not class 153.87(0.77) –5.44(0.66) –3.996(1.71)* –0.23(0.19) 1.03(1.18)
accord
Source: The authors.
Notes:
a. The coefficient estimate of each industry for every variable is given in front of each industry’s name, and the absolute value
of t-distribution for each estimate is present inside the parenthesis.
b. ** Signifies 5% level of significance; * signifies 10% level of significance.
c. n.e.s. = Not elsewhere specified.
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Table 10. Diagnostic Statistics Associated with Non-linear Import Demand Models

Diagnostic Statistics
Industry ECMt–1 F-test LM RESET Adj. R2 Wald-L Wald-S CUSUM CUSUM2
05—Fruits and –1.103(4.89)** 6.07** 0.75 13.06 0.77 7.19** 2.22 S S
vegetables
06—Sugar, sugar –0.47(1.795) 2.62 13.44 4.25 0.59 0.27 0.056 S S
preparations and honey
07—Coffee, tea, cocoa, –0.41(2.34) 11.68** 3.31 0.4 0.88 1.35 12.67** S S
spices and manufacturer
09—Micellaneous food –0.45(2.21) 1.54 1.4 0.03 0.91 1.09 0.54 S US
preparations
23—Crude rubbers –1.35(4.13)* 5.23** 11.99 1.38 0.72 2.45 9.42** S S
including synthetic
26—Textile fibers not –0.61(4.21)** 5.13** 0.52 0.49 0.91 5.26** 0.03 S S
manufactured
27—Crude fertilizers –1.15(4.39)** 9.82** 5.19 1.55 0.8 0.98 1.93 S S
and crude mineral
28—Metalliferous ores –0.84(4.86)** 5.22** 0.72 0.98 0.59 1.01 0.09 S S
and metal scrap
33—Petroleum and –0.42(2.92) 3.18 2.42 0.02 0.74 8.81** 1.36 S S
petroleum products
43—Animal and –0.91(3.57)* 3.27 0.58 6.33 0.58 8.11** 3.06* S S
vegetable oils and fats
51—Chemical elements –1.03(6.897)** 11.76** 3.07 1.19 0.98 1.23 6.7** S S
and compounds
53—Dyeing, tanning and –1.34(5.13)** 6.69** 1.23 1.15 0.96 4.21** 9.21** S S
coloring material
54—Medicinal and –0.50(2.89) 3.998 9.951 1.598 0.98 0.014 4.47** S S
pharmaceutical products
55—Perfume materials, –0.47(1.72) 5.09** 1.09 4.54 0.93 0.01 0.016 S US
toilet and cleansing
58—Plastic materials –0.54(4.42)** 7.44** 2.38 3.3 0.984 10.46** 5.67** S S
59—Chemical minerals –0.18(1.43) 1.93 9.03 25.37 0.97 0.52 0.05 S US
61—Leather, leather –0.57(3.87)* 4.59* 0.06 3.47 0.85 1.56 0.93 S S
manufacturers, n.e.s.
62—Rubber –2.74(4.74)** 12.79** 0.21 1.77 0.99 1.06 1.12 S US
manufacturer
63—Wood and cork –1.10(5.78)** 9.07** 0.07 0.02 0.98 27.93** 11.65** S S
manufacturer
64—Paper, paper board –0.06(0.93) 9.27** 0.42 1.97 0.976 0.62 13.6** S S
and manufacturers
65—Textile yarn,fabrics –0.67(3.62)* 3.56 0.01 11.41 0.97 13.75** 0.32 S S
made up articles
(Table 10 continued)
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20 et al. 529
Global Business Review

(Table 10 continued)

Diagnostic Statistics
Industry ECMt–1 F-test LM RESET Adj. R2 Wald-L Wald-S CUSUM CUSUM2
66—Non-metallic –0.34(2.73) 6.57** 7.5 8.73 0.984 5.74** 5.7** S S
mineral manufacturers
67—Iron and steel –0.31(2.70) 2.49 0.12 2.72 0.94 4.54** 0.25 S S
68—Non-ferrous metals –0.34(1.91) 4.64* 0.64 0.17 0.93 0.21 3.67* S S
69—Manufacturers of –0.49(1.55) 4.94* 1.17 3.59 0.94 0.03 0.82 S S
metal, n.e.s.
71—Machinery other –0.68(2.78) 3.98 0.03 1.93 0.952 0.27 0.79 S S
than electrics
72—Electrical –0.70(5.09)** 3.39 0 0.03 0.96 0.52 0.05 S S
machinery apparatus
73—Transport –0.97(4.89)** 5.95** 8.39 3.57 0.97 0.12 0.83 S S
equipment
81—Sanitary, plumbing, –0.59(2.82) 4.94* 1.55 0.08 0.97 1.601 13.05** S S
heating and lighting.
82—Furniture –0.39(3.78)* 2.94 0.011 2.51 0.98 1.34 3.63* S S
84—Clothing –0.346(2.77) 2.16 3.33 0.23 0.978 0.00 0.00 US US
86—Scientific and –1.16(8.41)** 15.4** 2.7 0.77 0.971 2.05 0.83 S S
control instrument,
photography
89—Miscellaneous –0.35(2.15) 2.07 6.69 5.99 0.969 2.53 0.96 S S
manufactured articles
93—Special transaction –1.38(7.70)** 12.99** 1.47 0.03 0.48 1.12 0.46 S S
not class accord
Source: The authors.
Notes:
a. Since Shin et al. (2014) have treated both POS and NEG as one variable; therefore, we can use the same critical values
of F-test which come from Pesaran et al. (2001). However, they are for large samples; hence, we have used the critical
values (4.15 at 5% level and 5.01 at 10% level) presented by Narayan (2005) which suits a small sample size like ours.
b. The values inside the parenthesis in the second column are absolute t-ratios. For critical values of ECMt-1, once again due
to a small sample such as ours, we have relied upon the critical values (-3.68 at 10% level and -4.18 at 5% level), when k
= 4, given by Banerjee et al. (1998, p. 276).
c. As the LM and RESET statistics are distributed at χ2 with one degree of freedom, their critical value is 3.84 at 10% level.
d. ** Implies 5% level of significance and * implies 10% level of significance.
e. Both Wald tests are also distributed at χ2 with one degree of freedom. Their critical values are 2.77 at the 10% and 3.84
at the 5% level.

Do short-run asymmetric effects translate to long-run asymmetric effects? If yes, in how many
industries? From the long-run estimates in Table 9, we gather that either the POS or the NEG variable
carries a significant coefficient that is meaningful (co-integrated) in 15 industries. These industries are
coded as 05, 23, 27, 51, 53, 58, 61, 62, 63, 66, 69, 72, 81, 82 and 86. The two largest industries, that is,
51 (chemical elements and compounds, with 5.16% share of imports) and 72 (electrical machinery
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Bahmani-Oskooee et al. Global Business Review 24(3)
21

apparatus with 21.27% import share) are in the list. Once again, the results are industry-specific. For
example, consider the largest Pakistani importing industry, 72 (electrical machinery apparatus with
21.27% import share). The prediction from the estimates of the linear models in Table 3 was that
exchange rate volatility has no long-run effects on the imports of this industry from China. If we were to
rely upon the traditional approach of estimating the linear models, we would have stopped our exercise
and concluded that exchange rate volatility has no long-run effects on the imports of the largest industry.
However, the results from the non-linear model in Table 9 reveal that while increased exchange rate
volatility has adverse effects on the imports of this industry, decreased volatility has no long-run effects,
a clear sign of asymmetric effects. It appears that in more industries, Pakistan’s economic activity and
the real rupee–yuan rate are the long-run determinants of imports.

Summary and Conclusion

The fall of the Breton–Wood system in the early 1970s ushered in a new era of floating exchange rate
system. As a result, the exchange rate between nations became more volatile in nature. This opened a
new door for researchers in the field of international finance to see how this volatility in exchange rate
affected the trade flows between different countries. Some academics were of the view that the
unpredictable nature of the exchange rate would deter trade flows due to the risk-averting behaviors of
traders, whereas others were of the opinion that the risk-loving traders might look at it as an opportunity
to trade more to avoid any loss in the future.
Until recently, all previous studies estimated standard linear models to infer the response of trade
flows to a measure of exchange rate volatility. If the measure carried an insignificant coefficient, they
concluded that exchange rate volatility had no significant effects on trade flows. Recent developments in
non-linear modelling and asymmetry analysis have revealed that once increased exchange rate volatility
is separated from declines, at least one of them could have a significant impact on the trade flows of a
country. In this article, we add to this literature by assessing the symmetric and asymmetric effects of the
real rupee–yuan volatility on commodity trade flow between Pakistan and China.
A total of 14 two-digit Pakistani exporting industries to China and 34 two-digit importing industries
from China for which there were continuous time series data were included in our study. The findings
could be best summarized by saying that when we estimated a linear export and import demand model
for each industry, we found short-run effects of the real rupee–yuan volatility on the exports of 10
industries and imports of 19 industries. The short-run effects turned into long-run significant and
meaningful effects in four exporting industries and 10 importing industries. However, the comparable
numbers were much higher when we introduced non-linear adjustment of the real rupee–yuan volatility
and estimated non-linear models. We found short-run effects of volatility in 12 exporting and 30
importing industries, which turned into long-run effects in eight exporting industries and 15 importing
industries. While short-run effects were asymmetric in almost all industries, long-run asymmetric effects
were limited to around 40–50 per cent of the industries.
Our findings have implications that are industry-specific, and traders in each industry should consider
them separately. For example, importers in the largest industry, 72 (Electrical Machinery Apparatus, with
21.27% import share) should not restrict themselves to estimates of the linear import demand model
which predicted that the real rupee–yuan volatility has no long-run effects. Apparently, exchange rate
volatility can move in a non-linear manner, and once it rises, it will hurt the imports of this industry.
However, declines will have no effects.
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22 et al. 531
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Appendix A
Data and Sources
Annual data over the period 1978–2018 are used for empirical analysis. Data sources are:

1. International Financial Statistics;

2. Word Integrated Trade System by World Bank; and
3. World Development Indicators.

Variables
Xit = Export volume of industry i from Pakistan to China. In the absence of prices at the commodity level,
following Bahmani-Oskooee and Aftab (2017), we used Pakistan’s aggregate exports unit value index to
deflate nominal values. While nominal export data come from source 2, export unit value index comes
from source 1.
Mit = Pakistan’s import volume of commodity i from China to Pakistan. Once again, in the absence of
prices at commodity levels, we used Pakistan’s aggregate unit value of imports to deflate the nominal
figures. While nominal import data come from source 2, import unit value index comes from source 1.
CPI CHN * NEX t
REXt = The real exchange rate between the rupee and the yuan. It is defined as REXt = ( ),
CPI PAK
where NEXt is the nominal exchange rate obtained by using the cross-exchange rates against the dollar
rupee dollar
as (*) . Thus, NEXt is defined as the number of rupees per yuan. Therefore, an increase
dollar renminbi
represents a depreciation of the Pakistani rupee. All data come from source 1.
YtPAK and YtCHN are the real incomes of Pakistan and China, respectively, both proxied by the GDPs of
the respective countries and coming from source 3.
Vt = Volatility measure of real exchange rate, REX. Following Bahmani-Oskooee and Hegerty (2009),
for each year we defined this variable as the standard deviation of the 12 monthly real exchange rates
within that year. Data on monthly exchange rate and CPIs come from source 1.

Acknowledgement
The authors are grateful to the anonymous referees of the journal for their extremely useful suggestions to improve
the quality of the article. Usual disclaimers apply.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of
this article.

Funding
The authors received no financial support for the research, authorship and/or publication of this article.

ORCID iD
Mohsen Bahmani-Oskooee https://orcid.org/0000-0002-8242-7715
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Bahmani-Oskooee et al. Global Business Review 24(3)
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Notes
1. See International Monetary Fund, World Economic Outlook Database, April 2019.
2. See comtrade.un.org/data.
3. Their results are inauthentic as they did not consider the stationary of variables; also, co-integration among the
variables was not established.
4. This section closely follows Bahmani-Oskooee and Aftab (2017).
5. Another advantage of this method is that short-run and long-run effects are estimated in one step by estimating
either model (3) or (4).
6. A few other researchers that have used the same concept are Apergis and Miller (2006), Verheyen (2013), Nusair
(2016) and Bahmani-Oskooee and Aftab (2017, 2018). For more application of these methods, see Halicioglu
(2007, 2008), Gogas and Pragidis (2015), Durmaz (2015), Baghestani and Kherfi (2015), Al-Shayeb and
Hatemi-J (2016), Lima et al. (2016), Aftab et al. (2017), Arize et al. (2017), Nusair (2012, 2017) and Gregoriou
(2017).
7. These 10 industries are coded as 26, 28, 29, 54,65,66,69, 84, 89 and 93.
8. In addition to the F-test and t-test in Table 2, a few additional diagnostics are reported. We have reported the
Lagrange Multiplier test as LM to check for serial correlation, and since the LM statistic is insignificant in most
models, the residuals are autocorrelation free. Ramsey’s RESET test also is insignificant in most models,
rejecting misspecification. Coefficient estimates are stable in almost all models as indicated by the outcome of
the CUSUM and CUSUM2 tests.
9. These industries are 05, 23, 33, 51, 54, 58, 59, 62, 63, 64, 65, 66, 68, 69, 71, 73, 81, 82 and 89.
10. Other diagnostics are similar to those in Table 2 and need no repetition.
11. Note that there is also evidence of short-run adjustment asymmetry in industries coded 05, 29, 54, 66, 71, 84, 89
and 93 since ∆POS and ∆NEG take a different lag order.

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