Impact of Macroeconomic Variables on Dhaka Stock Exchange

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The Impact of Fundamental Macroeconomic Variables on DSE Stock Price Index

Author: Nabil Ahmed, 071855020
Supervisor: Dr. Gour Gobinda Goswami
Professor, Department of Economics
North South University, Dhaka, Bangladesh

Abstract
This paper examines the impact of fundamental macroeconomic variables on the DSE stock price index such as industrial production, money supply, crude oil price etc. Numerous statistical techniques such as Vector Autoregression, Granger Causality, Impulse responses, and Variance Decomposition are carried out on transformed time series data. Results indicate that the DSE returns are not determined by the macroeconomic factors. However the DSE returns do influence economic variables such as industrial production, consumer price index and money supply. Through qualitative analysis it has been observed that factors such as investor confidence, expectations, Bangladesh Bank policies (reserve ratios, call money rate, lending capacity etc) market inefficiencies, institutional investors, liquidity etc are actually responsible for the DSE’s fluctuations. The paper utilizes monthly macroeconomic data collected from the Bangladesh Bureau of Statistics (BBS) and International Financial Statistics (IFS)for the period January 1992 to April 2010.

Acknowledgements
I would like to sincerely thank my family and friends for their support as I prepared this paper for over six months. I am also eternally grateful to Professor Dr. Gour Gobinda Goswami for his thorough guidance and patience. This paper deals with methodologies that are totally new and unfamiliar to me. But thanks to his thorough explanations and routine meetings I was quickly able to grasp the concepts and techniques. Thanks should also be given to Lund University Alumni Billura Bayramova and Saida Ojagverdiyeva. Their Master’s thesis on the Kazakhstan Stock market served as the basis of my own methodology and helped to clarify many technical questions. Finally, I would like to thank members of the Bangladesh Bureau of Statistics (BBS) for their exhaustive data and helpful service.

Contents
1. Introduction1
1.1 Background1
1.2 Approach2
1.3 Outline3
2. Literature Review4
3. Bangladesh Economic Overview12
3.1 General Economic Outlook12
3.2 Dhaka Stock Exchange (DSE)14
3.3 Chittagong Stock Exchange (CSE)16
4. Data Description18
5. Methodology and Empirical Results20
5.1 Testing for Unit Root and Stationarity22
5.1.1 Augmented Dickey Fuller Test23
5.1.2 ACF and PACF of DSE Closing Index25
5.1.3 Unit Root Test on DSE and macroeconomic Variables (Natural Log)27
5.1.4 Unit Root Test on DSE and macroeconomic Variables (Log Difference)28
5.2 Correlation Matrix30
5.3 Lag Length Selection31
5.4 VAR MODEL34
5.4.1 VAR Lag Structure41
5.5 Residual Correlation42
5.6 Granger Causality Test46
5.7 Impulse Responses50
5.8 Variance Decomposition59
6. Qualitative Case Study on the DSE65
7. Conclusion71
References75
Internet Sources76
Appendix78

List of Tables and Figures
Table 1. Structure of the Bangladesh Economy…………………………………………………………………………………….....12 Table 2. Bangladesh Macroeconomic Trends……………………………………………………………………………………………14 Graph 1. Index Movement of DSE, DGEN, DSE20……………………………………………………………………………………..15 Table 3. DSE Overall Scenario…………………………………………………………………………………………………………………..16 Table 4. CSE Market Scenario…………………………………………………………………………………………………………………..17 Table 5. Summary of Time Series Statistics……………………………………………………………….……………………………..20 Graph 2. Time Plot of DSE Index……………………………………………………………………………………............................21 Table 6. Unit Root Test on DSE Closing Index……………………………………………………………………………………………24 Graph 3. ACF and PACF in Levels………………………………………………………………………………………………………………26 Table 7. Unit Root Test (Natural Log)……………………………………………………………………………………………………….27 Table 8. Unit Root Test (Log Differenced)…………………………………………………………………………………………………28 Graph 4. ACF and PACF...
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