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September' 08

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Articles

Macroeconomic Uncertainty of the 1990s and Volatility at Karachi Stock Exchange

--Dawood Mamoon and Eatzaz Ahmad

This paper examines the short- to medium-term trends and volatility in Karachi Stock Exchange (KSE) and further explores the nature of relationship between stock market activities and a set of macroeconomic variables in the 1990s. The analysis is based on daily and monthly data on general stock price index and trading volume and monthly data on interbank call rate, wholesale price index, quantum index of manufacturing sector's output and monetary aggregate M2, and it covers the period from January 1992 to June 1999. This paper finds that in the 1990s, the stock market of Karachi had become more volatile both on short-term (daily) and medium-term (monthly) basis. Furthermore, strong volatility inertia was present in stock price index, trading volume, wholesale price index, manufacturing output and money supply. It also finds that there is no systematic relation between stock price volatility and real or nominal macroeconomic volatility. Likewise, for the sample period, a volatile trading volume was neither due to a volatile stock price nor due to the fluctuations and shocks taking place in the economy.

Trends, Behavioral Patterns and Growth Implications of Foreign Private Capital Flows in Nigeria

--Risikat Oladoyin S Dauda

This paper is a contribution to the often-debated role of foreign capital flows into economies of developing countries. This paper examines the magnitude and impact of foreign private capital flows on economic performance in Nigeria. Previous theoretical and empirical studies on this issue provided conflicting results. Secondary data on some relevant financial and macroeconomic indicators were collected from 1986 to 2006. Descriptive statistics, Pairwise Granger-Causality test and Ordinary Least Squares (OLS) regressions were used to analyze the interaction between indices like the degree of openness, domestic investment, portfolio equity investment, Foreign Direct Investment (FDI), and economic growth. The study found out that the economy is largely driven by domestic investment. Also, there is a positive relationship between index of openness, foreign private capital flow, proxied by FDI and equity or portfolio investment and GDP during the period under review. The major policy recommendation that emerges from this study is the need to put in place the policies that would promote stable and conducive macroeconomic environment, which would encourage foreign capital inflows into the economy of Nigeria.

Return Distributions: Evidence from Emerging African Stock Exchanges

--Subadar Agathee Ushad, Sooraj Fowdar, Sannassee Raja Vinesh and Moushumi Jowaheer

This paper provides an analysis of return distribution properties in the presence of non-normality of returns. Using secondary data, the study examines the behavior of returns in the emerging African Stock Exchanges, such as Botswana, Ghana, Mauritius, Nigeria and South Africa for the period 1998 to 2003. The statistical results show non-normality in the return series for African markets. Also, the findings show that mean returns from all the five emerging African markets are higher than the returns for the developed markets. Nearly all markets have positive excess kurtosis, which is consistent with the stylized fact of `fat tails' in equity returns. Furthermore, while the return series of African markets follow a non-normal distribution, developed markets closely approximate the normal distribution.

Association Between Stock Market Liquidity and Some Selected Macroeconomic Variables: A Case Study on Indian Stock Market

--Som Sankar Sen and Santanu Kumar Ghosh

This paper attempts to empirically study the relationship between Index of Industrial Production, Consumer Price Index, Exchange Rate of Indian Rupee against the US Dollar, Gold price and Money Supply with the Stock Market Liquidity. Using two widely used proxies to liquidity that is Turnover Ratio and Amivest Liquidity Ratio and applying long-run static model and Error Correction Model, the paper establishes significant relationship between Stock Market Liquidity and the selected macroeconomic variables. Moreover, the joint positive effect of macroeconomic variables has also been established with the help of the Principal Component Analysis.

Long Memory of the Indian Stock Market

--Ashutosh Verma

The weak form of efficient market hypothesis states that the share prices neither have a long memory nor a short memory. Long memory is characterized by non-periodic dependence in a financial time series over a long span of time. This paper examines the long memory of the Indian stock market by examining the daily returns of 60 companies with around 62% of the total market capitalization over a period of five years. The test applied to examine the long memory is Lo's modified rescaled long range (R/S) test, which is able to derive variance of the time series with a consistent estimate. This test is an improvement over the classical rescaled long range test and is not sensitive to short-term dependence. The results of the study indicate that the returns of only three companies exhibit long-range dependence. The computed test statistics for all other companies were found to be insignificant and showed the absence of long memory, supporting the weak form efficiency of the market.

Position of Foreign Direct Investment in India

--Komal Narang and Ravi Inder Singh

In the era of globalization, Foreign Direct Investment (FDI) plays an important role in the development of both developing as well as underdeveloped economies. Foreign Direct Investment (FDI) provides a number of benefits like introduction of new products, new skills, easy approachable markets and modern technology to the host countries. India is playing a very important role in the encouragement of foreign and overseas investors and their investments. India is being ranked as the second most favored destination for foreign investments after China by showing a growth of 184% in the year 2006-07. This paper examines the position of FDI in India. The importance of examining the position of FDI in India at this stage is perhaps more urgent in view of the shooting up of the stock exchange index over the last one and half years.