Determinants of Stock Market Performance in Nepal # Prakash Kumar Shrestha, Ph.D. * Biggyan Raj Subedi ** Abstract This paper empirically examines the determinants of the stock market performance in Nepal using monthly data for the period of mid-August 2000 to mid-July 2014. The impact of major changes in politics and Nepal Rastra Bank’s policy on lending against share collateral has also been assessed. Empirical results obtained from OLS estimations of behavioural equations reveal that the performance of stock market is found to respond positively to inflation and broad money growth, and negatively to interest rate. This suggests that, in Nepal, share investors seem to take equity as a hedge against inflation and consider stock as an alternative financial instrument. Further, availability of liquidity and the low interest rates stimulate the performance of the Nepalese stock market. More importantly, stock market has been found to respond significantly to changes in political environment and the policy of Nepal Rastra Bank. These findings help to design policies to stabilize or stimulate the share market in Nepal. Key Words: Stock Market, Macro Variables, Nepal JEL Classification: G10, E44 # The earlier version of this paper is available at www.nrb.org.np under NRB Working Paper series, NRB-WP-24, 2014. * Director, Nepal Rastra Bank, Research Department, Central Office, Baluwatar, Kathmandu, Nepal. Email:[email protected]** Deputy Director, Nepal Rastra Bank, Research Department, Central Office, Baluwatar, Kathmandu, Nepal. Email:[email protected]We would like to thank Mr. Shalikram Pokharel and Mr. Nanda Dhakal, Assistant Directors, Research Department, Nepal Rastra Bank for their help in preparing this paper. In addition, we are grateful to the Editorial Board and an anonymous external reviewer for providing valuable comments to revise this paper.
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Determinants of Stock Market Performance in Nepal of Stock Market Performance in Nepal 29 III. REVIEW OF LITERATURE The Arbitrage Pricing Theory, introduced by Ross (1976), establishes
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Determinants of Stock Market
Performance in Nepal#
Prakash Kumar Shrestha, Ph.D.*
Biggyan Raj Subedi**
Abstract
This paper empirically examines the determinants of the stock market performance in Nepal using
monthly data for the period of mid-August 2000 to mid-July 2014. The impact of major changes in
politics and Nepal Rastra Bank’s policy on lending against share collateral has also been
assessed. Empirical results obtained from OLS estimations of behavioural equations reveal that
the performance of stock market is found to respond positively to inflation and broad money
growth, and negatively to interest rate. This suggests that, in Nepal, share investors seem to take
equity as a hedge against inflation and consider stock as an alternative financial instrument.
Further, availability of liquidity and the low interest rates stimulate the performance of the
Nepalese stock market. More importantly, stock market has been found to respond significantly to
changes in political environment and the policy of Nepal Rastra Bank. These findings help to
design policies to stabilize or stimulate the share market in Nepal.
Key Words: Stock Market, Macro Variables, Nepal
JEL Classification: G10, E44
# The earlier version of this paper is available at www.nrb.org.np under NRB Working Paper
series, NRB-WP-24, 2014.
* Director, Nepal Rastra Bank, Research Department, Central Office, Baluwatar, Kathmandu,
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Appendix 1
List of Major Political Events and Likely Impact on Share Market S.
N. Date Event
Possible
Impact
1 June 2001 The Royal massacre. Bad
2 Feb. 2005 King Gyanendra dismissed Prime Minister Sher Bahadur Deuba and took up executive power.
Bad
3 Oct. 2005 Cease fire by the Maoists. Good
4 Jan. 2006 Cease fire withdrawn by the Maoists Bad
5 Apr. 2006 Restoration of Parliament and start of peace process Good
6 Nov. 2006 Peace agreement between the government and Maoists; Maoists agreed to lay down
arms. Good
7 Apr. 2007 Maoists joined interim government, a move that took them into the political
mainstream. Good
8 Jan. 2008 A series of bomb blasts killed and injured dozens in the southern Terai plains, where activists were demanding regional autonomy.
Bad
9 Apr. 2008 Former Maoist rebels became the largest party in elections of the new Constituent
Assembly (CA), but failed to get an outright majority. Bad
10 Aug. 2008 Maoist leader Puspa Kamal Dahal (Prachanda) formed coalition government, with
Nepali Congress in opposition. Good
11 May 2009 Prime Minister Prachanda resigned in a row with President Yadav. Maoists left the government after other parties opposed integration of former rebel fighters into
national army.
Bad
12 Jun. 2010 PM Madhav Kumar Nepal quit under Maoist pressure. Bad
13 May, 2011 Constituent Assembly failed to meet deadline for drawing up new constitution. Bad
14 Aug. 2011 PM Jhalnath Khanal resigned after government failed to reach compromise with
opposition on new constitution. Bad
15 May 2012 Prime Minister Baburam Bhattarai dissolved CA, called elections for November 2012, after politicians missed a final deadline to agree on a new constitution.
Bad
16 Nov. 2013
Election for CA second time. Nepali Congress party, Nepal Communist Party (UML)
became the first and second largest party with two-third majority together. These two
parties have some common political agenda.
Good
Sources: Dangol (2008) and BBC News, South Asia: http://www.bbc.com/news/world-south-asia-12499391
Appendix 2
List of Major Policy Changes by NRB on Loans against Share Collateral and
Likely Impact on Share Market
S.
N. Date Event
Possible
Impact
1 Oct7, 2007 Margin lending limit reduced to 50 % of last 90 days average price of shares; restriction on restructuring of margin loan; regulation requiring maximum period of
margin loan not to exceed 1 year.
Bad
2 Jan 22, 2008 Margin lending limit not to exceed 50 % of the last 180 days average price of shares or 50 % of market price, whichever is minimum.
Bad
3. Jan 15, 2009 Regulation requiring to make a margin call if the collateral is seen not sufficient to
secure the loan.
Bad
4. Oct 30, 2009 Restructuring of the margin loan was allowed provided that the 50 % of principal and interest has been repaid.
Good
5. Feb 22, 2010 No need to make margin call if the price fall of the share is not more than 10%;
About 75 % of margin loan amount was allowed to restructure
Good
6. Aug 10, 2010 Margin lending limit increased to 60% of the last 180 days average price of shares or
50 % of market price, whichever is minimum.
Good
7. Jul 14, 2011 BFIs were allowed to make self decision on the limit of margin lending based on the last 180 days average price of shares or 50 % of market price, whichever is
minimum; Revaluating the shares and extending loan limit was restricted.
Good
8. Jun 10, 2012 Loan could be extended with the guarantee from the broker instead of pledging original share certificates.