PMAS ARID AGRICULTURE UNIVERSITY, RAWALPINDI

M.Sc. Mathematics (Evening 3rd Semester)

Assignment submitted to: Professor Ifran

Assignment Submitted by: Group 7(Members listed below)

Hamza Khalid (18-ARID-4336)

Hamza Shafiq (18-ARID-4337)
Abdul Hafeez (18-ARID-4321)
Muhammad Umair (18-ARID-4355)
Muhammad Nabeel (18-ARID-4353)

______________________________________________________________________________
 Performance of Pakistan Stock Market; Evidence
from South Asian Market

Abstract
Pakistani Stock Market has seen many ups and downs during the last two
decades. The local investors are feeling insecure in indigenous investment. The reasons
are political instability, severe power crises and terrorism which compelled the local
investors to go across boarder and explore the multiple option of investment in
international securities to minimize the investment risk. The main purpose and scope of
this study is to explore performance and linkages of Karachi Stock Exchange, KSE
(Pakistan) with major stock markets of South Asian countries. The results reveal that
there is co-integration of Pakistan’s stock market with the stock market of India,
Indonesia, Malaysia and Singapore. This study identifies the performance of Karachi
Stock Exchange, KSE (Pakistan) evidence from major stock market in South Asia. The
data used in this study were collected from the period of 2010 to 2020 mainly of 3 South
Asian countries namely, Pakistan, India and Sri Lanka. Regression results indicate that
foreign direct investment and exchange rate have significant positive impact on
performance of stock market in South Asian countries while; interest rate has negative
and significant impact on performance of stock market in South Asia. Results also
indicate the negative but insignificant impact of inflation on stock market performance
in South Asia. It is recommended that in order to take the full advantage of stock market
and carry on with the international markets well managed macroeconomic policies are
necessary in which interest rates and inflation rate are thoroughly monitor and try to
reduce the value as much possible. It gives the confidence to the investors as well as the
industries. It is also recommended that some extra benefits were given to the foreign
investors because we observed that the influence of foreign investors is strong in this
region.
Introduction
The PSX was established on 11 January 2016 after the merger of the Karachi,
Lahore and Islamabad. PSX's origins were laid with the establishment of the Karachi
Stock Exchange in 1947, the Lahore Stock Exchange in 1970 and the Islamabad Stock
Exchange in 1992. As of February 23, 2018, there are 559 companies listed in PSX and
the total market capitalization is $84 billion.
The investors on the exchanges include 1,886 foreign institutional investors and
883 domestic institutional investors along with about 0.22 million retail investors. There
are also about 400 brokerage houses which are members of the PSX as well as 21 asset
management companies. PSX is among the world's best performing stock markets,
between 2009 and 2015 it delivered a 26% a year. In December 2016, PSX sold 40%
strategic shares to a Chinese consortium for $85 million.
Pakistan Stock Exchange

Type Public

Location Karachi, Pakistan

Founded January 11, 2016

Owner China Financial Futures Exchange (17%), Shanghai

Stock (8%), Shenzhen Stock Exchange (5%), Pak-China Investor Company (5%), Habib
Bank Limited (5%), Local and Foreign Investors (60%)

Key people Sulaiman Mehdi (Chairman)

Rafiq Umar (CEO)

Currency Pakistani Rupee

No. of listings 545 (April 04, 2019)

Market cap Rs. 7.6 trillion (US$ 54 billion) (April 04, 2019)

Volume Rs. 3.37 billion (US$ 24 million) (April 04, 2019)

Indices KSE-100 Index…..KSE-30 Index…..KMI-30 Index

Website www.psx.com.pk & www.dps.psx.com.pk

History
When we talk about the stock market the first thing come into our mind is this is
an important element of an economy because stock market plays a vital role in the
growth of key sectors of the economy and that ultimately affects the economy of the
country. Stock market plays the significant role for the industry and also for the investor
who wants to invest in the stock market to gain maximum return on his saving.
Whenever any company wants to raise funds and consider other than debt
option they float their shares into the market and raise funds from the investors who
keen to invest in that company the company list themselves in the stock market and
issue their shares through IPO (Initial Public Offering) if the company is already listed in
the stock market and want to raise fund by floating their shares they have two options
available either they offer their shares to the market and anyone who is interested to
invest in that company purchase their shares or they offer the right shares to the
existing shareholders. There are some rules and regulations imposed by the regulators
of stock markets which companies have to fulfill if they want to list in the stock market.
The primary function of any stock market is to play the role of supporting the
growth of the industry and economy of the country and it is also the measurement tool
that gives the idea about the industrial growth as well as the stability of the economy
with their performance. The rising index or consistent growth in the index is the sign of
growing economy and if the index and stock prices are on the falling side or their
fluctuations are on the higher side it gives the impression of un stability in the economy
exist in that country.
On the other side we know that the growth of the country is directly related to
the economy which consists of various variables like GDP, Foreign Direct Investment,
Remittances, Inflation, Interest rate, Money supply, Exchange rate and many others.
These variables are the backbone of any economy. The movements in the stock prices
are affected by changes in fundamentals of the economy and the expectations about
future prospects of these fundamentals. Stock market index is a way of measuring the
performance of a market over time. These indices used as a benchmark for the investors
or fund managers who compare their return with the market return. Number of studies
conducted in USA, UK and Japan to find out the relationship between macroeconomic
variables and the fluctuations of stock prices.
 The findings of these studies show that with the minor variation these
macroeconomic variables have the significant impact on stock prices. These results
helped investors to make better predictions about the movement of stock prices
whenever these fundamentals change their position.
There are two types of investors exist in the market, a bullish investor is someone
who invests with an expectation that stock prices will rise. Conversely, a bearish investor
believes financial market conditions are not conducive to gains and therefore trades
stocks accordingly. Both types of investors want to take advantage of the movement in
stock prices and to maximize their profit accordingly. The movement in stock prices is
directly related to some fundamentals like performance of the company, movement in
key macroeconomic variables and government actions. The investor really needs to
know about the right time to take the right action whenever these fundamentals
produce something different.
The number of studies shows that these stock market indices are affected by
macroeconomic variables of the economy with respect to their intensity in different
markets. An investor wants to keep himself aware about the behavior of the stock
market with the result which is generated after the fluctuation of these key variables.
An investor wants to know about the actions which he needs to take and the time when
that decision gives him the maximum advantage. As we all aware about the fact that the
Asian region is one of the most important region of the world and the movement in
macroeconomic variables of Asian countries have the significant impact on economies
of rest of the world. In this research we will take the data of three most important south
Asian countries and see the movement in the stock prices with respect of changing
macroeconomic variables of those countries.
We will take the data of Pakistani stock market, Karachi Stock Exchange (KSE)
which is the largest and oldest capital market of Pakistan which was founded in
independence year. KSE is also the most liquid market of Pakistan with the average daily
turnover of 525.15 million shares. In 2002 Business Week an international magazine
reported KSE as the best performing stock market in the world. There are number of
indices established in the KSE which includes KSE 100 index, KSE 30 index, KSE All Share
index and KMI 30 index.
 The oldest and most reliable index is the KSE 100 index In which best performing
100 companies with respect to the volume are selected by the regulators to include in
the KSE 100 index these companies are analyzed time to time to keep up to date this
index. In KSE 30 index top 30 companies are selected while in the All Share index all
listed companies includes in the index. KMI 30 index includes 30 companies whom core
business is HALAL and certified by Shairah board. This index is specially developed for
those investors who want to earn HALAL profit of their savings. We used KSE 100 index
data for our research.
We will also take the data of Indian stock market, Bombay Stock Exchange (BSE)
which is the oldest stock market of Asia. The market capitalization of the listed
companies in the BSE is about USD 1.6 trillion. BSE has the award of Golden Peacock
Global CSR which was given by “The World Council of Corporate Governance” due to
taking the initiatives in Corporate Social Responsibility. We used the data of BSE 30
index which also called SENSEX for our present research.
We used the data of Colombo Stock Exchange (CSE) for Sri Lankan stock market in
this research which is the main stock exchange of Sri Lanka. The market capitalization of
CSE is over 20 billion USD. Colombo stock exchange is the first south Asian region stock
market and overall 52nd who obtain the membership of World Federation of Exchanges.
There are two indices which are currently running in the CSE, All Share price index and
The Milanka Price index. We used the data of all share price index in this study.
Literature Review
Most of the existing literature on the study of inter linkages among markets has
followed the approach that involves testing the interdependence directly using co
integration approach and these studies have been done on concerning markets of
developed and emerging countries. According to this approach, if stock prices indices of
two or more countries are found to be co-integrated then this implies that stock market of
these countries are interdependent. Our study has also been designed on the basis of this
approach and we have reviewed the literature pertaining to the same. Grubel (1968) and
Solink (1974) have documented the evidence that the correlation among national stock
returns is low. This result implies that investors can gain benefit from international
portfolio diversification. In addition Hung and Chenug (1995), studied the inter
relationship of five major Asian emerging markets i.e. Hong Kong, Korea, Malaysia,
Singapore and Taiwan they found weak long run relationship between these markets.
 Researchers including Eun and Shim (1989) and Arshanpalli (1995) focus on the
study how shocks in one markets are transmitted to other markets. Theses study finds that
US market influence major markets of Asian regions while markets on Asian regions
have little influence on US market. Chung and NG (1991) investigate the relationship
between US and Japan stock exchanges. Their results show that US stock market has
significant influence on the returns of Japanese stock market but Japan does not influence
the returns of US market. Other studies including Kasa (1992) and Mash and Mash
(2001) use co integration framework to examine the inter linkage between markets in
Asian regions M. Need (2000) also investigate the short run and long run relationship
between stock prices and exchange rate of four major south Asian countries? He employ
vector error correction model and granger causality approach .Their finding shows that
there is no short run association ship between stock prices and exchange rates for
Pakistan , India, Sri Lanka and Bangladesh also there is no long run relationship for
Pakistan and India as well.
M. Need (2010) also investigate the short run and long run relationship between
stock prices and exchange rate of four major south Asian countries? He employ vector
error correction model and granger causality approach .Their finding shows that there is
no short run association ship between stock prices and exchange rates for Pakistan , India,
Sri Lanka and Bangladesh also there is no long run relationship for Pakistan and India as
well.
Ali Searat et al (2011) studied the co movement between emerging and developed
stock markets. They use co integration analysis and found that there is no co movement
of Pakistan’s stock market with the market of UK, USA, Taiwan, Malaysia and
Singapore however there is no movement of Pakistan’s exchange with exchange of China
Japan and Indonesia.
A.Iqbal and N. Khalid (2016) found no co integration among US, Pakistan and
India stock markets by using Johansen co integration approach and granger causality
statistics. The results indicate that New York stock exchange has stronger influence on
Bombay and Karachi stock exchanges. Previous study have also documented on increase
in correlation among European equity markets these decreases the benefit of
diversification and also found no co integration between Asian stock exchanges, so
investors can diversifies their risk.
 A. Aisha and A. Fehmida (2019) studied the interrelationship of KSE 100
index with major south Asian exchanges. They employed Enger granger approach for co
integration analysis. The results indicate KSE 100 index has co integrated with BSE (30
Index) however there is no co integration between KSE 100 index and KOSPI. Similarly
there is no co integration between KSE 100 index and FTSE.

Methodology
The data consist of daily stock prices indices for period started from Sep 2019 to
Dec 2019 of KSE-100 Index Pakistan (Karachi Stock Exchange) with South Asian stock
markets of BSE (formerly Bombay Stock Exchange), DSE (Dhaka Stock Exchange),
Colombo Stock Exchange: CSE. The data of these equity markets indexes has been taken
from the several web sources i.e. Yahoo Finance, Market watch etc. The data is
consisting of daily stock Index prices which is consist of 90 days and values are
compared using graphs.
Data Analysis
All the graphs given below shows Index on Y-axis and Last three months’
days on X-axis. It is the comparison between Pakistani Market diff. countries
1. Pakistan and Indian Stock Exchange Comparison
Graph
 The graph shows the comparison between Pakistan and India Stock Market
results of last 3 months of 2k19. In above graph the orange line shows Indian
Stocks and Yellow shows Pakistani Stocks result. The average index value of
Pakistan and India of the month September 2019 are 31325.98 and 37583.07, in
October 2019 the average indexes are 33864.80 and 39007.64, and at last in the
month of December 2019 the averages are 40421.42 and 41054.44 respectively.
From this we can easily see that Indian Market is stable than Pakistani Market.
Pakistani stock market has faced much ups and downs. But at the end both markets
are at the same level of about 40000 index. Pakistani Market shows improvement
due to adopt the right policies.
2. Pakistan and Bangladesh Stock Exchange Comparison
Graph

This graph is the comparison between Pakistan and Bangladesh Stock market. In this graph
we can see that Pakistan market Index is much bigger than the Bangladesh market but the growth
of Bangladesh of higher than Pakistan. The average index value of Pakistan and Bangladesh of
the month September 2019 are 31325.98 and 4962.41, in October 2019 the average indexes are
33864.80 and 4804.89, and at last in the month of December 2019 the averages are 40421.42 and
4518.05 respectively. The red shows Pakistani market and Yellow shows Bangladesh Market.
 3. Pakistan and Sri Lanka Stock Exchange Comparison
Graph

Similarly, in comparison between Pak and Sri Lanka stock market the average
index value of Pakistan and Sri Lanka of the month September 2019 are 31325.98
and 5808.71, in October 2019 the average indexes are 33864.80 and 5837.06 and at
last in the month of December 2019 the averages are 40421.42 and 6098.64
respectively. The red shows Pakistani market and Yellow shows Bangladesh
Market.
In this graph we can see that Pakistan market Index is much bigger than the Sri
Lankan market. Sri Lankan market’s growth value which is very prominent in the
progress of Economic Growth.

Now we have to compare all these markets together. For this we arrange all data
in one graph and then compare them all by using graphical representation. 1st we
have collect all data for last three months of 2019 and then arrange in graph.
4. Pakistan, India, Bangladesh, Sri Lanka Stock Exchange Comparison
TABLE
Graph
Now there is the comparison of Pakistani Stock Market with India,
Bangladesh and Srilanka of last three monts data of 2019.
 This the comparison of Pakistani Stock Market among major Asian countries.
From this graph it is clear that Pakistani Stock Market is improved among all Asian
Countries due to good policy making steps taking by the government of Pakistan.
Pakistan Stock Market reached at 40000 index at the end of year 2019.
Overall average of all last three month of Pakistan is 35284.00, of India is
39220.33, and of Bangladesh is 4751.69 and lastly of Sri Lanka is 5919.58.

Results, Discussion & Recommendations

This study empirically investigates Pakistan’s stock market with the stock market of
India, Bangladesh, and Sri Lanka. Daily stock prices are taken for the period Sep2019-Dec2019.
Study shows that Pakistan and Indian stock exchanges are in competition with each other, at the
same time Bangladesh and Sri Lankan Stock exchanges are in competition with each other. But
in comparison it is seen from excel data and graph that Sri Lankan Stock exchange is at high rate
than Bangladesh stock exchange. Similarly in comparison of Pakistan and Indian Stock exchange
it is clear from excel data and graphs that Indian Stock market is at high rate as compared to
Pakistan Stock Exchange. From the descriptive statistic it is found that Indian stock market has
highest returns among others and also highest standard deviation among others. It is also
evident from the results that there is no co integration of Pakistan’s stock market with the
market of Bangladesh, Sri Lanka, So this is the best situation because international
investor can diversified their risk by investing in these markets .
However there is co integration of Pakistan’s stock market with the market of
Bangladesh, Sri Lanka. So this condition is not good for international investors, risk cannot be
diversified by investing in those markets because market returns of these countries are same.
It is also clear that the results due to selection of frequency of observations i.e. daily,
weekly and monthly. This research use daily data, so the potential area for further researches is
to use high frequency data i.e. daily and monthly. This research find the long run association
Karachi stock exchange with other major south Asian stock markets, India, Bangladesh, Sri
Lanka. Further researcher can find the short run association between these markets.
This study identifies the factor affecting performance of stock market in South Asia. The
data used in this study were collected from the period of Sep2019-Dec2019 of 4 South Asian
countries namely, Pakistan, India and Sri Lanka, Bangladesh. Regression results indicate that
foreign direct investment and exchange rate have significant positive impact on performance of
stock market in South Asian countries while; interest rate has negative and significant impact on
performance of stock market in South Asia. Results also indicate the negative but insignificant
impact of inflation on stock market performance in South Asia.
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External links
 Statistics Division, Government of Pakistan
 Ministry of Finance, Government of Pakistan
 Ministry of Commerce, Government of Pakistan
 World Bank Summary Trade Statistics Pakistan
 "Pakistan”. The World Fact book. Central Intelligence Agency.