SAARC Journal of Human Resource Development 2007
26
Chittagong Stock Market of Bangladesh: Turning of a Weak-Form Market into an Efficient Market
Mohammed Abdullah Raihan
1
Mohammad Anwar Ullah
2
Overview
The Chittagong Stock Exchange (CSE) is a not-for-profit organization, formedand registered with the registrar Joint Stock Companies and Firms inBangladesh on April 1, 1995 as a public company limited by guarantee with anAuthorized capital of 15 0’000’000 divided into 500 shares of Tk. 300’000 each.The Exchange members are not its beneficiaries since they are not involved inprofit sharing and taking dividend. All its surpluses are spent on thedevelopment of capital market in the country. The principal activities of theExchange are to conduct, regulate and control the trade. Starting from a rentalbuilding, the exchange currently owns a two-storey building measuring 28’000sft. It is the second stock exchange of Bangladesh that started its journey withthe aim of offering the investors a transparent and efficient capital market. OnOctober 10, 1995 CSE introduced a fully automated screen based trading systemreplacing the obsolete setup enabling its trade operations from three major citiesin Bangladesh.In the backdrop of a strong desire to institute a dynamic, automated and atransparent Stock Exchange in the country, seventy reputed businesspersonalities under the leadership of the founder president Amir KhosruMahmud Chowdury
3
, , were chosen to establish and run the exchange. Only 30securities were listed on the first day trade when market capitalization stood atUS$0.2 Billion. Now CSE is facilitating investors through a fully automatedexchange with screen based trading facility on countrywide communicationnetworks. CSE started online trading system on the 30
th
may 2004. CSE offersbuying and selling and dealing in shares securities, bonds, debentures, govt.papers and any other instruments through brokers and dealers. It is also involvedin disseminating information to investors by publishing monthly portfolio andother necessary publications. The exchange is also involved in research anddevelopment activities pertaining to capital market.
1
Lecturer, Int’l Islamic University, Bangladesh. Email: maraihan76@yahoo.com
2
Lecturer, Eastwest University, Dhaka
3
MP and former Minister for Commerce
Chittagong Stock Market of Bangladesh:
27
CSE at a glance
Type of organization: A Not-for-profit public limited company byguarantee.Authorized capital: TK. 150 MillionsPaid up capital: TK. 38.7 Millions ($0.72 millions)Number of members: 129, all members are corporate bodiesNo. of listed companies: 212No. of listed Mutual funds: 10No. of listed Debentures: 04CSE all share Index: 1586.65CSE-30 Index: 1457.71Market capital: TK. 56.36 Billions ($ 1.037 Billions)Trading days: Sunday to Thursday.Trading procedure: Automated Trading System.On line trading system: 30
th
may, 2004.
Abstract:
The vast majority of efficient market research to date has focused on the major United States and European securities markets. A fewer have investigated the developing and less developed countries’markets and no study has been conducted on the Chittagong Stock Exchange (CSE). The study seeks evidence supporting the existence of at least weak-form efficiency of the market. The sample includes thedaily price indices of all the listed securities on the CSE for the period of 10/10/1995 to 19/01/2004. The hypothesis of the study is whether theChittagong Stock Market is weak-form efficient. The results of parametric test – auto-correlation test, auto-regression & ARIMAmodel – provide evidence that the share return series do not followrandom walk model and the significant autocorrelation co-efficient at different lags reject the null hypothesis of weak-form efficiency. Theresults are consistent in different sub-sample observations, without outlier and for individual securities. The issues are important tosecurity analysts, investors and security exchange regulatory bodies intheir policy-making decisions to improve the market condition. Thestudy warrants the continuity of research for a conclusive analysis and synthesis concerning the level of efficiency of the less developed market.
Introduction
The random walk theory asserts that price movements do not follow any patternsor trends and that past price movements cannot be used to predict future pricemovements. There are three forms of the efficient market hypothesis: firstly, the"weak" form asserts that all past market prices and data are fully reflected insecurities’ prices Or in other words, a technical analysis is of no use; secondly,the "Semi strong" form asserts that all publicly available information is fully
SAARC Journal of Human Resource Development 2007
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reflected in securities’ prices or in other words, fundamental analysis is of nouse; and lastly, the "strong" form asserts that all information is fully reflected insecurities’ prices or in other words, even insiders’ information is of no use.It is usually believed that the markets in developing and less developed countriesare not efficient in semi-strong form or strong form. The study seeks evidence of weak-form efficient market hypothesis (WFEMH) in a less developed emergingmarket like CSE. It is very much convenient to test the weak-form efficiency of the market rather than semi-strong form and strong form efficiency. The test of semi strong form and strong form efficiency is very rare in less developedcountries because of the absence of sufficient data in a convenient form. Theother impeding factors include: structural profile, inadequate regulations, lack of supervision and administrative slackness towards the application of existingrules. In Addition, companies’ information is released and circulated before theirannual report are published and officially available. The annual reports of someof the listed companies are mistrusted and often perceived as speculative by themarket. The market moved dramatically over a period of time and turned into aspeculation market and then a gamble market transforming the investors intospeculators.Moreover, share price indices data are available and reliable to test the weak-form efficiency of the market. The empirical research on market efficiency canbe divided into two broad categories: one is technical analysis, which is mainlyconcerned with testing for the availability of exploitable information from thepast security prices that is widely used in examining the weak-form efficientmarket hypothesis; the other is fundamental analysis, which rests on theassumption that factors other than the past security prices are relevant in thedetermination of the future prices. The first category of WFEMH testing can bedivided into two sub approaches: one is to determine the existence of predictability using the past return series or price information; another is to usetechnical trading rules if they can be exploited as profit making strategy. Theaim of the study is to test the former on the CSE. The study restricts attentionexclusively for WFEMH or return predictability using time-series analysis of stock return behavior in an emerging market. The remainder of the study isstructured as follows: Section 1 discusses the concepts and interactions betweenweak-form market efficiency and emerging market; section 2 reviews theprevious empirical evidences on weak-form efficiency; section 3 dilates uponthe data and the research method, section 4 describes the variables used in theanalysis; section 5 lays out the empirical results of the hypotheses while the lastsection, section 6 presents the summary and conclusions.
Correlation of Weak form Market Efficiency and Emerging Markets
A few studies conducted on the test of efficient market hypothesis (EMH) inemerging markets compared to the volume of studies published on the
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3. Chittagong Stock Market of Bangladesh Turning of a Weak-Form Market Into an Efficient Market
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