Factors on Stock Market Development in SAARC Region

Factors on tired Market festering in SAARC RegionThe Impact of Institutional and Macroeconomic Factors on Stock Market Development in SAARC regionFayaz Ahmed SoomroProblem StatementThere are m both researches concerned about the relationship between the Macroeconomic variables and the bank line commercialise performances1. Researchers kick in analyzed many different factors of Macroeconomic variables worry GDP, Savings, Credit facilities, Shares traded, interest rates, remittances from abroad, trade deficit, consumer banking, production of industrial goods, liquidity and more macroeconomic factors having crucial involve and are the major contributors in pains grocery ontogeny2. Researches also claim that thither is one way relationship between storehouse market in governing body and macroeconomic variables3. Researchers have also concentrated on the impact of lumber of institutions on the maturement of equity market in developing countries speci wholey4. However there is has been not much interested directed towards institutional gauge having impact on post-taking market victimisation in SAARC region. This research is focuse on testing the system and adding empirical evidence from in terms of impact of whole step of institutions on the increase of equity market. This research might help the various(prenominal) countries of SAARC in understanding better the factors contributing in the growth of stock market in the SAARC territory and May helps the policy makers to devise better and in effect(p) policies for the whole region.ObjectiveTo determine the impact of the quality of institutions with macroeconomic factors are having on the development of stock markets in SAARC region.Research QuestionWhat is the impact of quality of institutions with macroeconomic factors on the performance of the stock markets?Literature ReviewDevelopment of the Stock markets and the growth of the economyThere has been order that stock market development and ec onomic prosperity are highly correlated Levine and Zervos (1996). The study adopted positivist approach and correlational in nature and base on 41 countries in the period 1976- 1993, the quantitative method was adopted. It was deduced based on the hypothesis taking sample population of 41 countries in the period 1976- 1993 that there come through a high correlation among stock market and growth of economy.Unidirectional effect of Macroeconomic VariablesMacroeconomic factors affects the stock prices in the unidirectional way that is stock prices does not affects the Macroeconomic variables to change Hussain and Mehmood (2001). The approach adopted is quantitative in nature and falls in the domain of positivist research paradigm. The deduction was based on sample population of Pakistan by considering the period of 1959-60 to 1998-99.Stock Market and Economic Prosperity Evidence from IndiaEconomic prosperity is highly related with the stock market performance in the economy Deb and Mukherjee (2008). He analysed by the quantitative research methods and hence within positivism research paradigm that in India economic prosperity leads to the better stock market performances. He deduced that there is a relationship between economic prosperity and the stock market development in India by taking sample population of India from the period of ten social classs. It was also found that there exists a bidirectional causal relation among the express variables.Development in the Stock Market of PakistanLiquidity and the prices of the stocks do not have any relation in any direction Ali et al. (2010). This research falls into the Post Positivism research paradigm because it is refuting the generalization made in the literature that money supply and stocks prices have no relation at all in any direction. This was time-tested by using Granger-causality test, Augmented Dickey Fuller, Unit Root Test and the test of co-integration (Johansen) have been applied. He also found t hat there is no causality effect among the liquidity and stock prices, industrial production , exchange proportion, rising prices, balance of trade and prices of the shares in Pakistan.Foreign enjoin Investment is highly related to stock market development Raza et al. (2012) this research adopted quantitative and hence followed the positivism research paradigm that is, it tested the supposition in consistent with the literature. The factors like savings, rising prices and money exchange rates were also considered and were found significant. Savings were in line with stock market nonetheless(prenominal) inflation and money exchange rate were found to have a negative impact.The research found that 70 percent of the increase in development of stock market is caused by the one percent change in FDI inflow. This is a huge impact so the government of Pakistan should be looking forrad to protect the foreign investors and facilitate them as much as possible. There should be framework un der which the foreign investors can take the easily their break out and keep on investing in order to promote the stock market activities in the region.Stock Market development in BangladeshThe stock market of the Bangladesh is not mature yet and its not up to the standards of international markets, however this research identified many factors affecting the stock market development in Bangladesh Rrahman and Rahaman (2011). The research adopted quantitative and followed Positivist approach. Data was collected from the period 2001 to 2008 and was collected from various reliable sources of Bangladesh. Many different statistical techniques were used like descriptive analyses, correlation analyses were applied. All the variables were found to have significant impact. It was also suggested that Bangladesh stock market is highly volatile and there has much to change in order to make it up to international standards.Stock Markets and the Institutional QualityInsitutional quality plays im portant role in the development of various sectors of the economy. Its import has been tested and proved significant in the non banking financial sector in the bosom East and African regions Creane et al. (2004). The proxies that were used are Banking Industry, Money Supply, gradely pecuniary and fiscal policies, industrial regulations, financial corruption and the quality of institutions. Recommendation made in this report is about to increase the quality of institutions.Yartey (2008) Institutional factors including the political stablity, quality in bureaucracy, stability of democracy, corruptions, general regulations and laws with other macro economic factors were found to have a significant effect on the stock market activities because it ordinarily increases financial facility to the general public and they tend to invest in the equity market. The selective information was collected from the period 1990 until 2004 that is total 14 years of 42 emerging economies. The data was analyzed through regression analysis. However risk in the political stability was suggested a major contributing in the stock exchange market enhancement.In other Burhop et al. (2011) tried to find the regulatory personate as the important components of the stock exchange market. In his studies he considered peachy of the United Kingdom equity market and the stock market of berlin and quantified as in the form of IPO- initial Public Offerings. However he could not conclude whether regulatory body plays an important role in the stock market activities but he found that long term profits and survival in the competition as the important factor in the successful market.Research MethodologyEpistemologyThis research tries to identify the Institutional factors and other macroeconomic factors that lead to the development of stock market, this knowledge already exist and justified in the region of Middle East in the International Monetary Funds working paper of Billmeier and Massa (2007) . reputation of KnowledgeThis research tries to test already existing knowledge in the literature Billmeier and Massa (2007) which was specifically applied in the regions of Middle East and Central Asia. The theory has been tested quantitatively that exist in literature and adopted Positivism approach. This research adds the empirical proof from the SAARC region.Methodology- PositivismThis research is also quantitative in nature and follows the positivism approach because its in consistent with the existing literature and follows the systematic scientific approach to find its applicability in the SAARC region. The chess opening in the empirical evidence was identified and in order to fill the gap same propositions were developed but in different context of its finishingValidityThe method, approach, statistical technique and the measurement of the variables are in consistent with the International Monetary Funds working paper. That means theory already exist but it has been applied in the different context that is in SAARC region. Institutional quality has been measured as a index of Economic immunity by Heritage Index of Economic emancipation and other macroeconomic variables has been measured and reported by the World Bank and the data has been collected from their make reports. The detailed measurement is as followsMarket Capitalization This is has been measured as total value of the shares outstanding in the stock markets which is the total sum of shares prices compute by the no of outstanding securities. For this research it has been taken as the percentage of GDP.IQ Institutional Quality Institutions are the formal governing bodies in any country which look after the overall governing structure of the economy. These institutions guide the economy about political activities, social activities and the economic activities. Quality of institutions is enhanced with economic and effective working of institutions. Quality is measured by Heritage Foundati on as score from 0 to 100, the lowest value being the poorest form of quality and higher the score the higher the quality.INC Income It is represented as the total value of production within the country and has been measured at constant base of year 2000 US $ in Billions.INV Investment It is represented by the addition in the aggregate value of fixed assets with any inventories. This has been taken in this research as capital formation percentage of the GDPSVT Stock value traded It is represented by the shares total value in the specific period. This has been also taken as percentage traded over GDPDC Domestic credit It is represented by the total value of lending to the customers in the private sectors. This has also been taken as percentage of GDP.ReliabilityThis theory has been applied in the region of SAARC region from the period 1996 to 2012. It is suggested the this theory will produce more or less the same results if carried out in the different period of time in the SAARC re gionGeneralizabilityThis same theory was applied and proved in the region of Middle East. This research also proved and produced the same results in the SAARC region hence It can be concluded that this theory is applicable to the regions with similar conditions of economy like in Middle East and Central Asia.Synthetic a posteriori propositionThe proposition in this research says that Institutional Quality and macroeconomic factors have significant and positive impact on the stock market development in the SAARC region. This proposition is a synthetic a posteriori and subject to empirical verification from the higher up region.Deduction ReasoningGeneral statements1 Quality of institutions affects importantly on the development of stock market.2 GDP affects significantly on the development of stock market.3 Domestic credit affects significantly on the development of stock market.4 Stock traded value affects significantly on the development of stock market.5 Gross capital formation af fects significantly on the development of stock market.HypothesesHo1 Quality of the institutions affects insignificantly on the development of stock market.Ha1 Quality of the institutions affects significantly on the development of stock market.Ho2 GDP affects significantly on the development of stock market.Ha2 GDP affects insignificantly on the development of stock market.Ho3 Domestic credit affects significantly on the development of stock market.Ha3 Domestic credit affects significantly on the development of stock market.Ho4 Stock traded value affects significantly on the development of stock market.Ha4 Stock traded value affects significantly on the development of stock market.Ho4 Gross capital formation affects significantly on the development of stock market.Ha4 Gross capital formation affects significantly on the development of stock market.Conclusion1 Institutional quality does impact significantly on the development of stock market2 GDP does impact significantly on the dev elopment of stock market3 Domestic credit does impact significantly on the development of stock market4 Stock traded value does impact significantly on the development of stock market5 Gross capital formation does impact significantly on the development of stock marketFalsificationAs this research is in consistent with the existing theory and has been only tested without amendments hence it is not refuting any theory of knowledge but adds empirical evidence in the literature from untested region that is South Asian connecter of Regional Cooperation (SAARC) countries.Data Collection and SourceIn this research secondary data has been used. Data of institutional quality collected from the Index of Economic Freedom of Heritage Foundation. Data of macroeconomic variables collected from the World Bank.Target PopulationThe research focuses on the regions of SAARC economies in particular countries Pakistan, Bangladesh, India, Nepal and Srilanka.Sample SizeThe dataset of 5 economies has bee n considered. The year 1995 to 2010 that is for 15 years of 5 countries of the SAARC region making it a total observations of 75 has been taken as the sample size.Statistical TechniqueThe sample data of dependent variable and independent variables will be analyzed by ordinary least square method of multiple regression analyses technique.Research role modelMCP = + 1 IQ + 2 INC + 3 INV + 4 SVT + 5 DC + eWhereMCPMarket CapitalizationIQ Institutional QualityINC IncomeINV InvestmentSVT Stock value tradedDC Domestic credit11 Deb and Mukherjee (2008) Mustafa and Cagatay (2012)2 Ali et al (2010), Raza et al (2012)3 Hussain and Mehmood (2001)4 Billmeier and Massa (2007), Lombardo and Pagano (2000), Yartey (2008), Burhop et al (2011)