Distribution of Risk and Return: A Statistical Test of Normality on Dhaka Stock Exchange

The present study deals with the normal distribution of risk and return of the capital market of Bangladesh. Normal distribution of return is an essential assumption in the field of efficient market hypothesis which posits that the returns of a market must follow the random walk behaviour. Again it is an integral part of Capital Asset Pricing Model, which suggests that if an investor wants to get higher return then he must consider higher risk, this denotes to the normal distribution of risk and return. This study has used a set of parametric and non-parametric tools to examine the returns calculated from the three indices of Dhaka Stock Exchange: DGEN (from 2002 to 2010), DSE20 (from 2002 to 2010) and DSI (from 2006 to 2010). As positive skewness and kurtosis are evident in most of the cases, the returns are found to be suffering from some extremities. Daily, weekly and monthly returns are not normally distributed which shows the contra-evidence of random walk behaviour of market return. Besides the inconsistency between risk and return (daily and weekly) is found, which suggests that additional return may be achieved without having exposure to additional risk. Keywords: Dhaka Stock Exchange, Efficient Market Hypothesis, Kurtosis, Non-parametric Test, Normal Distribution, Parametric Test, Risk and Return, Skewness

Efficiency and Volatility of the Stock Market in Bangladesh: A Macroeconometric Analysis

Abstract. This study investigates the weak form efficiency of Efficient Market Hypothesis (EMH) employing Autocorrelation test, Runs test and Unit Root tests,  and the  nature  of  volatility characteristics of stock returns applying GARCH family models in Bangladesh  stock market using  daily all share price index return  data  of Dhaka Stock Exchange (DSE) from 02 January 1993 to 27 January 2013. This studyalso examines  the semi-strong form  of  the  EMH of DSE based  on  macroeconomic  variable  version  of  the  Arbitrage Pricing Theory (APT) applying Cointegration tests, Vector Error Correction Model (VECM) and Granger causality tests,  and  the volatility of the DSE returns in response  to  the  volatility of the  macroeconomic variables employing GARCH family models using monthly data from January 2001 to December 2012.In addition, the short run and long run relationships between macroeconomic variables and aggregate stock prices in Bangladesh have also been determined. Employing both nonparametric tests (Runs test and Phillips-Perron test) and parametric tests (Autocorrelation test and Augmented Dickey-fuller test), this study finds that the DSE of Bangladesh is not weak form efficient. Taking the outcome of VAR models into account, it is found that all selected macroeconomic variables do significantly explain the stock prices of the Bangladesh stock market. As a consequence, it may be concluded that the Bangladesh stock market is not efficient in the semi-strong form of EMH. Results of the estimated MA(1)-GARCH(1,1) and MA(1)-EGARCH(1,1) models reveal that stock market returns of Bangladesh exhibit leptokurtosis, volatility clustering and leverage effect. Results of six GARCH-S models indicate that thevolatility of DSE return is significantly influenced by the volatility of macroeconomic variables, such as, exchange rate, broad money supplyandstock returns of India.Keywords. Efficient market hypothesis, Stock prices, Vector error correction model, GARCH family models, Volatility.JEL. C58, E44, F36, G10, G14

Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

This paper empirically examines the issue of market efficiency and time-varying risk return relationship for Bangladesh, an emerging equity market in South Asia. The study utilizes a unique data set of daily stock prices and returns compiled by the authors which was not utilized in any previous study. The Dhaka Stock Exchange (DSE) equity returns show positive skewness, excess kurtosis and deviation from normality. The returns display significant serial correlation, implying stock market inefficiency. The results also show a significant relationship between conditional volatility and the stock returns, but the risk-return parameter is negative and statistically significant. While this result is not consistent with the portfolio theory, it is possible theoretically in emerging markets as investors may not demand higher risk premia if they are better able to bear risk at times of particular volatility (Glosten, Jagannathan and Runkle, 1993). While circuit breaker overall did not have any impact on stock volatility, the imposition of the lock-in period has contributed to the price discovery mechanism by reverting an overall negative riskreturn time-varying relationship into a positive one. As a policy to improve the capital market efficiency, the timely disclosure and dissemination of information to the shareholders and investors on the performance of listed companies should be emphasized.

An Empirical Study of the Relationship between Macroeconomic Variables and Stock Price: A Study on Dhaka Stock Exchange (DSE)

Literature strongly supports vibration of the stock price as a consequence of various macroeconomic factors (Darrat, 1990; Fama & Schwert, 1977; Jaffe & Mandelker, 1976; Nelson, 1976; Pearce & Roley, 1985; Ripley, 1973). This study has investigated the explanatory power of various macro-factors such as inflation rate, exchange rate, interest rate, money supply and production index on the variability of the stock price in Bangladesh. Multiple regression analysis has been conducted to asses the relationship between the stated macro economic factors with stock price. All share price index of the Dhaka Stock Exchange has been used as a proxy for stock price, the dependent variable of the study. No significant relationship has been found between the stock price and any of the macroeconomic factors. The study bodes well for advanced empirical models with additional macroeconomic variables.

Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market

This paper empirically examines the issue of market efficiency and time- varying risk return relationship for Bangladesh, an emerging equity market in South Asia. The study utilizes a unique data set of daily stock prices and returns compiled by the authors which was not utilized in any previous study. The Dhaka Stock Exchange (DSE) equity returns show positive skewness, excess kurtosis and deviation from normality. The returns display significant serial correlation, implying stock market inefficiency. The results also show a significant relationship between conditional volatility and the stock returns, but the risk- return parameter is negative and statistically significant. While this result is not consistent with the portfolio theory, it is possible theoretically in emerging markets as investors may not demand higher risk premia if they are better able to bear risk at times of particular volatility (Glosten, Jagannathan and Runkle, 1993). While circuit breaker overall did not have any impact on stock volatility, the imposition of the lock-in period has contributed to the price discovery mechanism by reverting an overall negative risk-return time-varying relationship into a positive one. As a policy to improve the capital market efficiency, the timely disclosure and dissemination of information to the shareholders and investors on the performance of listed companies should be emphasized.

Evaluation of stock market technical efficiency with a comparison of groups of companies in Dhaka Stock Exchange

The objective of this study was to measure stock market efficiency of the groups of companies, such as Group-A (financial), Group-A (non-financial), Group-B and Group-Z of Dhaka stock exchange (DSE) market in Bangladesh applying the Stochastic Frontier approach, incorporating technical inefficiency effect model. Among the four groups, most efficient group was Group-A (financial) and most inefficient group was Group-Z.This study showed that the mean technical efficiency of the companies of DSE market during the period 2000 to 2008 was 0.8782. This implied that 87% of potential output was being realized by the companies of DSE market.In case of using production function model; it was found that the Translog production function was more preferable than the Cobb-Douglas production function. The technical efficiency rate was found gradually increasing over time in the stock market in Banglades

Test of Weak Form of Efficiency in Emerging Markets: A South Asian Evidence

This study examines the weak form of efficiency of three South Asian markets named as Dhaka Stock Exchange (DSE), Bombay Stock Exchange (BSE) and Karachi Stock Exchange (KSE) for a period between January 2000 to June 2010. Data used in the study is monthly closing values of the indices of the said exchanges. The study uses autocorrelation test, unit root tests, co-integration test and Granger causality test to examine the efficiency of the markets. Empirical result reveals that the returns do not follow normal distribution and the distributions are leptokurtic. Autocorrelation and unit root tests imply that the data series are stationary. Johansen co-integration test indicates that there is common stochastic trend shared by the markets. Granger causality test implies that the knowledge of the past return behavior in one market is unlikely to improve forecasts of returns of another market with some exceptions. So tests result implies that the markets are not weak form of efficient

How Efficient is Dhaka Stock Exchange in Terms of Weak Form of Market Efficiency?

Weak form of market efficiency is quite a buzzword among the academicians of financial arena. Part of thestatistics dominated methodology of this study had used inputs of the previous studies – studies back in days of1960’s. By using monthly market return series data, the researchers had tried to check whether DSE - DhakaStock Exchange had been efficient in the weak form or not. Evidence of weak form of efficiency had been alsotested across time slabs, across share category and across industries. Both parametric and non-parametric testswere used to find out evidence of random walk behavior. To add variations in the study daily return series andunsmoothed return series were used. The researchers had not found any evidence of weak form of marketefficiency for Dhaka Stock Exchange on the whole, even though there was a sign of improvement in terms ofweak form of market efficiency across time. The returns of stocks and market portfolio were found to be autocorrelatedand market generally overreacted to information. The effectiveness of two-market anomaly basedtrading strategy (momentum and weekend effect) was tested based on ex-post return series but these strategiesfailed to garner sustainable abnormal profit. But still the researchers cannot refute the possibility of a trading ruleor a few trading rules extracting abnormal return in an inefficient market like Bangladesh. There was no real signof weak form of market efficiency across share categories and across industries. Inefficiency in the weak formwas an expected result, but whether the sign of improvement (in terms of weak form of market efficiency for therecent time slab) is sustainable in the long run or not is a big question.Keywords: Market efficiency, market anomalies, trading rul

Weak Form Efficiency of Pakistan Stock Market using Non-Parametric Approaches

This paper studies the performance of Karachi Stock Exchange (KSE) of Pakistan via nonparametric approaches. The study includes the weekly open and closing prices of KSE- 100 indexes for the period of 1st January 1999 to 31st August 2009. Several non-parametric approaches including KolmogorovSmirnov test (Lilliefors test), Ryan-Joiner test (Shapiro-Wilk), Anderson-Darling test, Phillips Perron (PP) unit root test and Runs test are used to test the conviction of the KSE stock market. All non-parametric tests graphically and numerically inform us that both return series do not follow the assumption of normality and randomness, which means rejecting the hypothesis of weak form of efficiency. Generally, results from the observed analysis strongly recommend that the Karachi Stock Market of Pakistan is not efficient

Stock Prices and Microeconomic Variables: T-Y Granger Causal Evidence From Dhaka Stock Exchange (DSE)

This study examines the long-run equilibrium relationship and the direction of causality between stock prices at Dhaka Stock Exchange (DSE) and a set of four stock market oriented factors technically can be defined as microeconomic variables. Through utilizing the methods of Unit Root tests, Johansen and Juselius (1990) Cointegration test and the long run Granger Causality test proposed by Toda and Yamamoto (1995), we have investigated the long-run equilibrium relationship as well as causal relationships between the DSE all share price index (DSI) and the four microeconomic variables (i.e. market dividend yield, market price-earnings multiples, monthly average market capitalization and monthly average trading volume) using monthly data from the period January 2000 to December 2010. Significant findings include long-run equilibrium relationship among the variables under study. However, DSI, in any way, do not granger cause dividend yield; but DSI has bi-directional causal relation with market price-earning multiples and the first lag of the monthly average trading volume. On the other hand, unidirectional causality is found from DSI to the first lag of monthly average market capitalization but no causality is found from the opposite direction. Keywords: Microeconomic Variables, Unit Root Test, Cointegration, T-Y Granger Causalit