Micro and Macro Dynamics of the Stock Market: An investigation into the Dhaka Stock Exchange DSE)

From a theoretical perspective, based on the Efficient Market Hypothesis, stock prices always should incorporate and reflect all publicly available information (see Fama, 1970). Gergoriou et al. (2009) assert that among asset prices, stock prices are typically closely monitored and are commonly regarded as being highly sensitive to economic policy news. The influence of various macro and non-macroeconomic factors including monetary and fiscal policy variables on the stock markets have been studied rigorously in earlier literature, such as Fama (1981), Pearch and Roley (1985), Chang, (2009) Belo and Yu (2013). Nevertheless, some related issues, such as the investors’ behaviour after the weekend, daily transmission of information across markets, and influence of various macro and non-macroeconomic information on returns, volatility and liquidity, have been ignored or little empirical evidence is available; particularly documentations from emerging and frontier markets are rare. This study therefore selects the Dhaka Stock Exchange (DSE), an emerging equity market and the main exchange of Bangladesh for investigation. We provide firm level evidence by sorting all listed firms on the DSE into size, dividend and sector. This study is an empirical study by nature and followed quantitative approach to carry forward the research process. For the purpose of analysis, we have used secondary data and applied several time-series and panel based econometric methods. Major findings from this study are: First, the market opens from Sunday to Thursday and the ‘information content theory’ works; there is a ‘Sunday effect’ in returns and variance. Supporting the ‘information processing hypothesis’ the study finds that trading patterns of individual investors create the weekend effect and the results are significantly different for size and dividend yield based portfolios. Second, the volatility of the DSE is significantly influenced by the residuals of Japan, Hong Kong, Canada and the US. Investors take regional information from markets in similar time-zones but adjust world factors from the US and Canada at the beginning and end of the week. The multivariate cointegration shows that the DSE is cointegrated with markets from similar time-zone as suggested in Bekaert et al. (2005). Third, timing of breaks in the returns and volatility coincide with the timing of monetary policy, fiscal policy, political uncertainty, government policy, national election and electoral system as suggested in Ardagna (2009) and Chau et al. (2014). The top and bottom 20 percent firms are more sensitive to any information, however smaller firms are significantly affected by monetary policy. Financial and manufacturing sectors are subject to both macro and non-macro news. Fourth, the (il)liquidity of the DSE is significantly caused by the bank rate, government borrowing and private borrowing. The results indicate that there is significant ‘crowding out’ and ‘cost of funds’ effect in the DSE. Finally, the 2008-09 financial crisis had positive impact on market liquidity.