This thesis has been carried out in partial fulfillment of the Master ‘s Degree in Finance, University of Wales for the twelvemonth 2011/12.
The rubric, “ Development of Capital Market and Behaviour of Share Price in Nepal: A instance survey from 2006/07 to 2010/11 ” , itself justifies the importance of research for finance grade sought. Many research workers had conducted in this subject worldwide and in Nepal excessively, nevertheless, the old research done in this filed in Nepal is non satisfactory in footings of range and country that covered. Of class, the gradual betterment and the altering scenario made research worker to make some in depth research in this subject trusting the decision made would be good for investors and make full the spread between the researches.
This research is more concentrate to analyze development of Nepali capital market in recent clip and to associate the monetary value behavior theories whether it is applicable in present state of affairs or non. Furthermore, it explores about the signalling factor to see how the secondary market has responded on that state of affairs.
1.2 Design of the Research
This research contains six chapters including debut. Introduction chapter trades with the general nomenclature of the research. As a whole, this chapter will show general apprehension of the fiscal market followed by inside informations constituents of capital market. Research aims, research inquiry, research hypothesis, and research aims are besides discussed in inside informations, which this research has tried to happen. The purpose of this research is to research whether in existent sense capital market has developed since Fiscal Year ( FY ) 2006/07 or non and to associate the portion monetary value behavior theories to the altering scenario. To accomplish this aim two-research inquiries were established. Further, research hypothesis and aims have been set. Then after intent and range are explained to give clear position, why it is necessary to make this peculiar research.
1.2.2 Literature Review
This is 2nd chapter that entirely concentrate on the literature reappraisal sing capital market, and the indexs used to specify development of capital market. As developed capital market is really different prospectus than development of capital market. So this research is chiefly motivated to analyse the present Nepali state of affairs of capital market ( FY 2010/11 ) comparison to FY 2006/07. Therefore, this portion extensively concentrates on literature reappraisal that trades with development of capital market.
As capital market grows or developed so this must convey some alterations in the portion monetary value behavior. Therefore, some literatures of stock monetary value behaviors have been besides conducted every bit good.
Nature of the research is really sophisticated as it deals with the index to mensurate development of capital market. That is the ground more than one approached has been used to warrant development. Hypothesis is established to see whether Nepali capital market had developed in recent twelvemonth or non. For this, widely accepted Karl Pearson ‘s Coefficient is used to warrant with relation between listed companies and traded companies. Probability mistake ( P.E. ) is used to find the important relationship.
This research has been conducted in the clip where Nepali capital market has changed significantly. Infrastructure development like Central Depository System ( CDS ) , Credit Rating Agency, add-on of three new Mutual Funds, add-on of agents had taken topographic point. Addition to that more companies was listed and so as tradable scrip. With all these betterment this research expects to happen that capital market of Nepal has developed comparison to last five old ages and it holds the efficient market theories. In simple, future monetary value, anticipation is non possible in altering scenario.
1.2.5 Analysis/ Discussion of Findingss
This chapter is design to analyse the findings. A determination from the primary information will seek to associate with the literature reappraisal. Analysis has found that capital market has developed since FY 2006/07 but it does non needfully keep either the rule of market efficiency hypothesis or random walk theory. In simple sense, future portion monetary value can be predicted in Nepal. So, Nepali capital market runs in an inefficient signifier. Sing primary informations more than 65 % of respondent expressed that capital market had developed. Almost all the consequence that obtained from primary informations matched with the secondary informations findings.
1.2.6 Conclusions/ Recommendations
This is the last chapter of the research, which deals with the chief decision based on the analysis. This will explicitly reply to what extent the research aims, inquiries, hypothesis or aims have been met. Further, recommendations will be made consequently.
It is discussed above that research has found development in Nepali capital market but it had denied the monetary value behavior theory. Therefore, the decision made was development of capital market does non needfully intend it is a developed capital market.
Nepal is least developed state that is the ground underline facet of efficiency market hypothesis or random walk theory does non look to be true. It does non keep weak signifier or a semi strong signifier of efficient market hypothesis.
Fiscal markets can be defined as the Centres or agreements that provide installations for purchasing and merchandising of fiscal claims and services. In this term, the function of fiscal system in economic development has been a much-discussed subject among economic experts. Financial markets perform four of import economic maps.
First, they enable persons to take more efficaciously between current and future ingestion.
Second, the interaction between purchasers and Sellerss in a fiscal market determines the monetary value of the assets, or instead, the return demanded by investors to put in the company. Firms can raise farther capital if the return on their investings exceeds the return demanded by investors.
Third, fiscal markets provide liquidness to investors. That is, the proprietor of the fiscal plus can sell off the plus in the market place to recognize hard currency whenever required. The grade of liquidness may change from plus to plus and market to market.
Fourth, fiscal markets can train under-performing directions. The predominating stock monetary value of a company reflects the sentiment of all market participants sing the mentality for the company under the current direction.
The fiscal market consists of two division- money market and capital market. The money market is fundamentally entitled to provide finance on short-run footing to persons, concerns, endeavors, authorities and their bureaus. The capital market, on the other manus, provides finance on medium to long-run footing to corporate organic structures, authorities and their bureaus Al-Faki, ( 2006 ) cited by Donwa and Odia, ( 2010 ) .
1.3.1 Money Market
Money market may be defined as short-run fiscal assets market, which facilitates liquidness and marketability securities. Actually, it is the market for short-run market instrument holding less than annual adulthood period. The development of an efficient money market requires the development of establishments, instruments, and operating processs that facilitate broadening and deepening of the market and allotment of short-run resources with minimal dealing costs and lower limit of holds.
Though money market is non a related subject of this research, so capital market will be discussed in inside informations.
1.3.2 Capital Market
Capital Market plays a important function in any modern economic system as they allow investor ‘s fund to flux to the most promising chances, i.e. , the financess are mobilized and channelled expeditiously from rescuers to the users of financess.
Capital markets provide an effectual manner of securing long-run financess by publishing portions and unsecured bonds or bonds for corporate endeavors and authorities and at the same clip supply an investing chance for persons and establishments ( Adhikari, 2004 ) .
The capital market is a market where adoption and loaning of long-run financess takes topographic point so in brief it deals in both debt and equity.
Capital Market Instruments
The instruments are the securities that are traded in the stock market. The instruments can be catogrised into three major groups of securities harmonizing to Herbert ( 2004 ) . These are:
In recent clip, derived functions are besides included as an of import capital market instruments ( Mary, Adedrinan and Elizabeth, 2012 ) .
1.5 Types of Capital Market
1.5.1 Primary Market
Harmonizing to Soyede ( 2005 ) , Primary market is a market for new securities. It is a platform where the company or authorities can raise money for investing or where already quoted companies can raise fresh financess for enlargement. Both the Securities Board of Nepal ( SEBON ) and the Nepal Stock Exchange ( NEPSE ) are involved in primary market activities in Nepal.
1.5.2 Secondary Market
This enhances the new issue market in many ways, it provides the agencies by which investor can supervise the value of their portions and neutralize them when they wish to make so. Harmonizing to Pandey ( 2006 ) , “ it is a market where bing securities are traded on day-to-day and uninterrupted footing. It is the market for bing securities. This consists of exchanges and over-the counter markets where securities are bought and sold after their issue in the primary market. ”
1.5.3 Importance of Secondary Market
If there were no secondary market in which investors could turn investings in new issues back into hard currency when they choose, many investors would non purchase new issues in first topographic points. If any investors genuinely intend to do any irrevokable committedness of their financess, the handiness of a secondary market is an absolute pre-requisite to the being of a primary market in common stock. From the position of the overall economic system, the secondary augmentation of the flow of financess into the new issue market is peculiarly of import. It makes it possible for the economic system to do long-run committedness in existent capital. This point is possibly best illustrated by sing what would happen if the fiscal claims issued by houses and persons could non be traded in the secondary market.
The secondary market makes it possible for those who desire to do long-run existent investings to obtain the money capital of rescuers who have no connotation of perpetrating themselves for the long term. Therefore, they provide the economic system with the chance to see wholly new attacks to constructing its capital stock ( Josiah et.al, 2012 )
1.6 Purpose and Scope
Development of capital market is must for a sound industrial development of the state like least developed state like Nepal.
Capital market establishments help to mobilise the excess unit to shortage unit for productive investings. As it mobilize the scattered resources and channels them in productive sector. It is an effectual instrument of spread outing productive capacities of the state. In Nepal, unluckily, despite a history of half decennary of planned economic sciences activities to develop existent sector of a state, small attending was paid to the development of fiscal market. Over the past one and half decennary fiscal market, despite many jobs, has developed significantly in Nepal.
Stock Exchange in many states has a long history of more than one century. For illustration, the India stock market has a history of more than 130 old ages ( Mishra et. Al, 2010 ) . The stock exchange of Nepal has non so long history and it has faced so many ups and downs during this short history. However, gradual betterment in substructure and policy has given strong cardinal base for the Nepali Capital Market.
Past decennaries has witnessed several new patterns in Nepali capital market. During this period a figure of initial public offering ( IPOs ) were made. Many new stocks have been listed in NEPSE. The listing of more agro-based industries like Dairy Development Corporation, telecom and hydropower have made the portion market more reflective of economic growing. Having the sensitive nature, economic, societal, and political intervention would straight impact on capital market. The phase of development of capital market in any state and its effectual growing is depended upon the aggregative economic status, salvaging and investing chance etc.
Although there are assorted establishment involved in capital market, they have non been able to demo good public presentations harmonizing to the outlook of investors. At the same clip there is no denying in the fact that investors are responsible for non holding self-denial, self-judgment in the pick of securities for investing. Thus holding deficiency of equal cognition about the securities of certain in companies, investors are randomly puting in portions. So it is necessary to make some research on Nepali capital market in altering state of affairs. Therefore, the intent of this research is to ease the cognition to all interested stakeholders of capital market.
1.7 Research Aims
In Nepal since capital market constitution in 1993, it has witnessed many alterations. Specifically the alterations were on the ordinances and substructure. Constitution of Central Depository System ( CDS[ 1 ]) and debut of more common financess[ 2 ]has decidedly changed the scenario. Well it is non deniable that Nepal is least developed state ( UNCTAD, 2011 ) nevertheless, the disciplinary attack towards capital market had helped it to research. Compare to old last five old ages its range has increased and the engagement of both investors and borrower had plenty infinite for development. So, the chief purpose of this research is to research whether in existent sense capital market has developed since FY 2006/07 or non and to associate the portion monetary value behavior theories to the altering scenario.
Therefore, in general this research is to stare on the being of weak signifier in footings of Random Walk Theory ( RWT ) mentioning Nepali Capital Market has developed significantly since FY 2006/07.
1.8 Research Questions
What are the present province, position, and elements that affect NEPSE index?
Which monetary value behavior theories explain the best signifier of Nepali capital market?
1.9 Research Hypothesis
The thesis formulates the following testable statement:
H0: Capital Market has developed in Nepal.
H1: Capital Market has non developed in Nepal.
H0: There is no difference between NEPSE index before and after signalling factor.
H1: There is difference between NEPSE index before and after signalling factor.
H0: The consecutive monetary value alterations are independent.
H1: The consecutive monetary value alterations are dependent.
1.10 Research Aims
The aims of the survey are as follows:
To analyse Nepali capital market development / growing
To analyze sector wise overall motion of NEPSE Sensitive index to happen out hazardous sector.
To look into if political and ordinances are the factor that has effected NEPSE index.
To look into the predictability of future portion monetary value in Nepal
Chapter 2: Literature Reappraisal
2.1 Capital Market
The capital market is one of the most critical countries of the economic system as it provides companies entree to capital, and investors with a piece of ownership in the company and the potency of additions based on the company ‘s future public presentation ( Ujunma & A ; Modebe, 2012 ) . Some survey defined capital market as a long-run beginning of support. Karla ( 2006 ) defines capital markets as “ the market which specializes in giving long term loans to the industry. In wide sense, capital market incorporates intermediary establishments, capital formation, mobilisation, and channelling of long-run capital, every bit good as regulative governments Obiakor and Okwu, ( 2011 ) .
Whereas some has defined as the market where, loaners ( investors ) provide long-run financess in exchange for long-run fiscal assets offered by issuers. The market is an of import establishment for capitalist states because it encourages investing in corporate securities, supplying capital for new concerns and income for investors ( Ujunwa, 2008 ) . Therefore, to ease the transmutation of assets Alice ( 2007 ) had provided different position, as he clarifies that the capital market is made up of markets and establishments, which facilitate the issue and secondary trading of long-run fiscal instruments.
Aligning with this, Osage ( 2007 ) merely sees it as the market responsible for long-term-growth capital formation. Ologunde and Assail ( 2006 ) gestate capital a aggregation of fiscal establishments set up for the granting of medium and long-run. Further, they considered the stock market as individual nor even a double market but instead a web of specialised fiscal establishments, which, in assorted ways, aid to convey together providers and users of long-run capital fund. Finally, capital market does non merely supply the long-run capital alternatively, it has many maps.
The capital market is alone in a state ‘s fiscal system because of its curious function in the economic system. Levine ( 1991 ) cited by Ujunma & A ; Modebe ( 2012 ) , identified these functions as: raising capital for concern, mobilising nest eggs for investing, easing company ‘s growing, redistribution of wealth, publicity of corporate administration, making investing chances for little investors, authorities capital raising avenue for development undertakings and being a barometer of the economic system.
Recent research has defined capital market in wide sense as web of specialised fiscal establishments, series of mechanism, procedures and substructure that in assorted manner facilitate the conveying together of providers and users of medium to long term capital ( Kolapo and Adaramola, 2012 ) for investing in economic development undertakings Donwa and Odia, ( 2010 ) .
2.1.1 Capital Market Development Indicator
Capital markets are a critical portion of the fiscal development and economic development of a state. This is the ground several efforts have been made by old research workers to associate the development of capital market with the economic system ( Kolapo and Adaramola, 2012 ) .
In other word, development of capital market has been linked with the economic growing. Harmonizing to BuyukAzalvarci and AbdioAzlu, ( 2011 ) , “ Capital market plays important function in mobilisation of domestic resources and imparting them expeditiously to raise economic production and productiveness. The degree of capital market development is therefore an of import determiner of a state ‘s degree of nest eggs, efficiency, and investing and finally its rate of economic growing ” . Therefore, in general, economic barometer that reflects the development of capital market in any state.
It has been clear from above that capital market is really of import for the state. So is there any index to mensurate development of capital market?
Numerous researches had conducted sing to mensurate development of capital market. It is explained earlier that capital market has strongly linked with economic growing. In this sense, famously used index is gross domestic merchandise ( GDP ) .
Obiakor and Okwu ( 2011 ) had considered relevant indexs of economic growing and public presentation of capital market ; such are GDP, market capitalisation value of portions traded foreign private investing and gross capital formation. All mentioned research had found that development of capital market has positive relation with economic growing. In simple, the economic growing can be defined as capital market development.
Adeyemi ( 2009 ) , utilizing gross capital formation and figure of quoted companies as steps of capital market development, found that capital market development has positive important impact on economic growing.
Torre, Gozzi and Schmukler ( 2007 ) , examined the impact of reforms of capital markets on economic development in Latin American states. For steps of capital market development, they used market capitalisation, value traded, and capital raised. On the same clip, they used one-year rising prices rate and ratio of authorities shortage to GDP as alternate indexs.
Some research documents had tried to research development of capital market with distinguishable position.
They suggest the existing of a clear and positive relationship between market liquidness and economic growing. Empirical surveies provide some support to above statement. In a cross state arrested development, Levine and Zervos ( 1998 ) cited by ( N?s et al, 2010 ) found a important positive correlativity between stock market liquidness and current and future rates of economic growing, after commanding for economic and political factors.
Switching from the above statement, some has linked capital market efficiency as the future economic growing. Where Mark, ( 2011 ) , explains bettering the efficiency of the capital market has become a accepted agencies of run intoing national aims such as heightening productiveness and fight, cut downing local environmental costs associated with capital market minutess, advancing nest eggs and investing on economic broad footing ( Mark, 2011 ) . At international degree, it is considered a cardinal component of scheme to extenuate the hazard ” of capital flight associated with deficiency of international investors ‘ assurance in the market. In this context, bettering capital market efficiency in the development and transitioning states is peculiarly of import because these states exhibit considerable potency for such betterment and, in the instance of the development states, since they will lend progressively to the hereafter of the capital market as their economic systems grow ( Ujunwa and Salami, 2010 ) .
However, Grais and Vittas, ( 2005 ) , had provided contrasting position other than explained above as “ aˆ¦the challenge of increasing the liquidness of markets, heightening their transparence, and guaranting their unity as capital market development. ” They further explained, it is, in fact, progressively underscored that what affairs for accomplishing the economic benefits of securities markets, it non the figure of listed companies and entire market capitalisation but instead the market liquidness in an environment of transparence and unity.
In recent research, different attack had been used to specify development of capital market. Some research had used fiscal sector as the index and other had used awareness degree as an index of capital market development.
Consensus exists on the positive relationship between the size and deepness of the fiscal system and the supply and hardiness of fiscal services that are of import subscribers to economic growing ( World Economic Forum, 2011 ) .
By fiscal system, it means development of fiscal establishment that provides capital either manner to needed establishment.
Paramati, ( 2011 ) had argued that fiscal sector development installations capital market development and in bend rises existent growing of the economic system. With a different attack Mary, Adedinran & A ; Elizabeth, ( 2012 ) had provided the same position. They explained in their research with the wide categorization of capital market are the security market and non-security market. The non-security, which comprises of bank and bank related establishment, chiefly intermediate in debt and debt related instruments. This type of fiscal market establishment performs largely in developed capital market, which supports the position of development of capital market.
Capital market consists of portion market and debt market. Therefore, some research shows development of stock market reflects the development of capital market. Stock Market are the accelerator for heightening the operations of the full domestic fiscal system and the Capital Market in peculiar ( Kenny and Mosh 1998, cited by Obiakor and Okwu ( 2011 ) . This position is more applicable to least developed state like Nepal where more than 80 % of capital is raised through portion market.
Capital Market have important interest on Gross Domestic merchandise ( GDP ) of the national economic system, which creates the employment chances through capital formation and growing as a whole. Nevertheless, merely being of the capital market does non vouch the important part for the GDP and economic growing. The mechanism created the micro degree salvaging mobilisation, an chance and challenges, excessively. The fiscal literacy and awareness degree, i.e. investor ‘s literacy, instruction and cognition, might be the important elements for the healthy growing of the market ( Kadariya et.al, 2012 ) . Investor consciousness is the cognition of investing and about the of import updates of the market. To spread out and to accomplish the sustainable growing of economic system, investor consciousness and their committedness for the long-run investing drama the critical function. Therefore, it is expected that the consciousness and the committedness move in the same way, and their association contributes a batch to the economic development.
It is mentioned antecedently that liquidness as an index that explain development of capital market. Some research workers had done an exceeding research to demo that liquidness can be achieved by engagement of educated investors.
Harmonizing to Kadariya et Al ( 2012 ) , ” Investor consciousness is important for the investing determination devising and sustainable growing of capital market ” . They farther explain that to the full cognizant equity investors have more opportunities of keeping high volume of equity investing.
Equity investors with higher educational background have more investing than those with lower degree of instruction ( Kadariya, 2012 ) and that is important for the investing determination devising and sustainable growing of capital market ( Kanadriya et.al. 2012 ) .
2.2 Theories of Stock Price Behaviour
Simply stock monetary value behavior refers the motion of stock monetary value in the secondary capital market, i.e. market value is more than book value, market value is less than book value and market value is more than book value due to the different internal and external factors. It ever been panic to investors how their portions performs in market. By the nature, they ever want to derive through security trading, which is impossible without proper apprehension of market they invested.
2.2.1 Market Efficiency
A market is efficient if it uses the information available right in puting and seting monetary values of securities. Inoga ( 1997: 24 cited by Josiah et.al, 2012 ) . Market efficiency refers to two indispensable ingredient of monetary value accommodation to new information. It is Speed and quality ( way and magnitude ) of the accommodation. The chief consequence of efficiency in capital market is that it precludes most investors from the capacity or ability to out-perform the market. However, the market is lacking in term of velocity and quality of it reaction, the sophisticated investors would hold small trouble in gaining from the state of affairs. There are two of import theories available
Efficient Market Hypothesis ( EMH )
Random Walk Theory ( RWT )
2.2.2 Efficient Market Hypothesis
Eugene Fama foremost introduced EMH in twelvemonth 1964 in early 1960. Fama ‘s part in efficient market hypothesis is important. The EMH provinces that the current market monetary value reflects the assimilation of all the information available. This means that given the information, no anticipation of future alterations in the monetary value can be made.
As new information enters the system, the imbalance province is instantly discovered and rapidly eliminated by the right alteration in the monetary value ( Ma and Wong, 2012 ) .
Harmonizing to Josiah et.al ( 2012 ) made a differentiation between three degrees of market efficiency.
184.108.40.206 Weak Efficiency
A market is efficient in the weak signifier if portion monetary values to the full reflect the information implied by all anterior monetary value motions. Share monetary value motions go entire independent of old monetary value motion connoting the absence of lone monetary value form with prophetic significance
Monetary values would merely react to new information such as new economic event of new industry.
The deduction of this is that historical monetary value and returns information does non supply a footing for superior prediction of future monetary value or returns. Therefore, past information can non assist investors crush the market and do inordinate returns.
220.127.116.11 Semi Strong Efficiency
This is efficient on the semi strong sense if portion monetary value respond outright and indifferent to new published information. The deduction of semi strong efficiency is that current portion monetary values would constantly stand for the best reading of the information about the house
Therefore, it becomes ineffectual for investors to seek for deal chances from analysis of published informations, such as one-year studies or other corporate proclamations designed to entice them to the market.
18.104.22.168 Strong Efficiency
The market is efficient in the strong signifier if portion monetary values to the full reflect non merely published information but besides all relevant information including informations non yet publically available
To reason the reappraisal on the efficient capital market theory, it can be asserted that if monetary values and returns predominating at any point in the capital market make reflect all available historic and current public information, it will be hard for investors to accomplish superior public presentation by judging that security market conditions may be better or worse in the hereafter.
2.2.3 Random Walk Theory
In twelvemonth 1900 a Gallic mathematician, Louis Bachelier wrote a scientific paper suggesting, that day-to-day security monetary value fluctuation were random which subsequently known as Random Walk Theory. Harmonizing to theA theory, A stock monetary value alterations have the same distribution and are independent of each other, A soA theA past motion or trendA of a stock monetary value or market can non be used to foretell its hereafter motion ( Falinouss, 2007 ) .
In short, this is the thought that stock monetary values take a random and unpredictable way. Followings of the random walk theory believe it is impossible to surpass the market without presuming extra risk.A
Random Walk theory has similar theoretical underpinning to semi strong EMH where all public information is assumed to be available to everyone. However, RWT declares that even with such information, hereafter anticipation is effectual.
From EMH and RWT two distinguishable trading doctrines have been emerged. These two conventional attacks to fiscal market anticipation are proficient and cardinal analysis. In the undermentioned subdivisions, the differentiations between these two attacks are stated.
2.2.4 Technical Trading Approach
Technical analysis is based on clip series informations. It tries to calculate stock markets utilizing indexs of proficient analysis. It is based on the widely accepted hypothesis, which says that all reactions of the market to all intelligence are contained in existent clip monetary values of stock. Because of this, proficient analysis ignores intelligence. Its chief concern is to place the bing tendencies and expect the future tendencies of the stock market from charts. However, charts or clip series informations merely contain the event and non the cause why it happened ( Kroha and Baeza- Yates, 2004 ) .
In proficient analysis, it is believed that market timing is critical and chances can be found through the careful averaging of historical monetary value and volume motions and comparing them against current monetary value. Technicians utilize charts and patterning techniques to place tendencies in monetary value and volume. They rely on historical informations in order to foretell future results ( Schumaker and Chen, 2006 ) . There are many assuring calculating methods developed to foretell stock market motions from numeral clip series. Auto arrested development and moving norm are some of the celebrated anticipation techniques, which have dominated the clip series anticipation for several decays ( Sewell, 2008 )
2.2.5 Cardinal Trading Approach
Cardinal analysis developed by Thomsett in 1998 investigates the factors that affect supply and demand. The end is to garner and construe this information and at earlier, the information is incorporated in the stock monetary value ( Sutheebankjard and Premchaiswadi, 2010 )
In this doctrine, the monetary value of a security can be determined through the nuts and bolts of fiscal Numberss. These Numberss are derived from the overall economic system, the peculiar industry ‘s sector, or most typically, from the company itself. Figures such as rising prices, industry return on equity ( ROE ) and debt degrees can all play a portion in finding the monetary value of a stock ( Schumaker and Chen, 2006 ) .
2.3 Capital Market: Global Position
Modern capital markets have two related parts: ( 1 ) the debt and equity markets that intermediate financess between rescuers and those that need capital, and ( 2 ) the derived functions market that consists of contracts such as options, involvement rate, and foreign exchange barters, typically associated with these underlying debt and equity instruments.
The debt and equity markets help apportion capital within an economic system. The derived functions market helps investors and borrowers to pull off the hazards built-in in their portfolios and asset/liability exposures ( Dudley & A ; Hubbard, 2004 ) .
The planetary capital market is deriving depth every twenty-four hours. Along with the development of this market, the liquidness is besides turning at a rapid gait. Fiscal stocks are turning worldwide and their growing rate is much higher than that of planetary gross domestic merchandise ( AllianceBernstein, 2012 )
The size of stock and bond markets around the universe in August 2011, shows that planetary capital market has reached all clip high with $ 212 trillion of which 75 % consists of bonds, ( $ 175 trillion ) and 25 % of stock ( $ 54 trillion ) ( McKinsley & A ; company, 2011 ) . The entire derived functions have reached to $ 700 trillion at the terminal of August 2011 ( Mann, 2011 ) .
The development of the planetary capital market can besides be traced by the fact that the fiscal retentions of the universe is turning rapidly. The planetary stock of debt and equity grew by $ 11 trillion in 2010 ( McKinsley & A ; company, 2011 ) . This sum is expected to traverse the $ 250 trillion grade by the terminal of 2015 ( finance, maps of universe, 2012 ) , where as the value of the planetary market increased by 5 % in 2010 to $ 54.9 trillion following a 45 % rise in the old twelvemonth ( Maslakovic, 2011 )
Capital markets have been the driving force behind the development of the UK and US fiscal systems.
In the US, the capital markets have become the dominant component of the fiscal system in three ways.
First financess raised in US debt markets now well transcend financess raised through the US banking system ( McKinsley & A ; company, 2011 )
Second, more 36 % of US families owned equity in some signifier ( The Big Picture, 2012 )
Third, the derived functions market has grown inordinately quickly. In U.S. the fanciful value of derived functions securities outstanding rose to $ 244 trillion in September 2011 ( Mann, 2011 ) from about $ 6.7 trillion at year-end 1990. Interest rate barters has an estimated of 82.1 % of derived functions stand foring the biggest portion of this market 10.6 % in foreign exchange rate barters, 6.1 % in recognition derived functions, and 1.2 % are in trade goods and equity contracts ( Comptroller of Currency Administrator of National Banks, 2012 )
Figure: Major Holders of U.S. Equities
Beginning: The Big Picture, 2012
In these fortunes, the US is playing a critical function in the development of the planetary capital market. U.S. entirely is the finish of 85 % of the net capital flow of the full Earth. Britain besides plays a important function in the market. ( McKinsey & A ; Company, 2011 ) .
separate informations from Securities Industry and Financial Markets Association ( SIFMA ) , puts the US bond market at merely under $ 37 trillion ( 63.4 % ) as of the terminal of 2011 and Bloomberg puts US stocks at about $ 24.2 trillion ( 36.6 % ) by the terminal of April 2012 ( qvmgroup, 2012 ) .
Figure: Market Capitalization of Listed Companies ( % GDP )
Beginning: World Bank 2012 and the Writer
Figure: Market Capitalization of Listed Companies in SAARC part
Note: India ‘s informations excluded ( really large Numberss ) , Afghanistan, Bhutan, Maldives informations are non available
Beginning: World Bank 2012 and the Writer
2.4 Capital Market: Asia
In the past few decennaries, Asiatic states have experienced a enormous economic growing, although temporarily interrupted by the Asiatic fiscal crisis. Along with the strong economic growing, capital markets in this part have shown a rapid enlargement, and have played an progressively of import function in furthering economic development ( Hsu, 2000 ) .
Hsu farther explains Asiatic states have enjoyed abundant nest eggs. Some states in this part have domestic nest eggs rates of more than 30 per centum. In no other parts in the universe do states hold such big reservoirs of domestic nest eggs at their disposal. Asian ‘s high nest eggs rates have provided the platform for robust capital markets.
While Asia has been preoccupied with economic recovery and fiscal reforms over the past few old ages, the economic constructions of most Asiatic states have been bit by bit modified, and their capital markets are in the procedure of transmutation. Along with these alterations, several cardinal tendencies are emerging in the part ‘s capital markets. ( South Asiatic Capital Markets Conference, 2010 )
Equity Capital Market ( ECM ) in Asia ( excepting Japan ) have had a blue 4th one-fourth so far, raising merely $ 22 billion, worst consequence since the first one-fourth of 2009 ( $ 14 billion ) and twelvemonth to day of the month, ECM volume is down 44 per centum from 2010 issue of $ 291.1 billion to merely 162.4 billion ( Keohane, 2011 ) .
hypertext transfer protocol: //blogs.r.ftdata.co.uk/beyond-brics/files/2011/12/Asia-Ex-Japan-ECM-volume.png
Figure: Asia ( Ex Japan ) Equity Capital Market Volume
Beginning: Dialogic cited by Keohane, 2011.
Since the Asian fiscal crisis in 1997-98, policy shapers in Asia and Pacific have put a high precedence on bond market development. As a consequence, the domestic debt market of Asia and Pacific has grown quickly, about duplicating in size from $ 10.5 trillion in September 2004 to $ 20.8 trillion by March 2011 ( Shim, 2011 ) .
2.5 Development of Capital Market in Nepal
Institutional development of securities market in Nepal started from the twelvemonth 1976 when Securities Exchange Centre ( SEC ) was established under the companies act with the joint capital part of Nepal Rastra Bank ( NRB ) & A ; Nepal Industrial Development Corporation ( NIDC ) . The Industrial Policy of the authorities besides encouraged the publicity of securities exchange activities in Nepal. Nepal authorities under a plan initiated to reform capital market converted SEC into Nepal Stock Exchange ( NEPSE ) in 1993. NEPSE is non-profit organisation, runing under Securities Exchange Act, 1983.
Nepali capital market was given proper construction in June 1993 with the constitution of Securities Board of Nepal ( SEBON ) as the market regulator. Since its constitution, SEBON has been concentrating its attempts on the legal and statutory models, which are the bases for the healthy development of capital market. SEBON Nepal is the supreme organic structure to modulate the Nepali securities market ( Bhusal 2010, Dangol 2008, and Gurung 2004 ) . As a portion of its uninterrupted attempts to construct a sound system, Institutional Reform and Informal Sector advice to amended the securities exchange act, 1983 in 1996. In add-on, this act was amended for the 2nd clip on January 30, 1997.
This amendment paved the manner for set uping SEBON as an apex regulative organic structure as it widened the skyline of SEBON by conveying market mediators straight under its legal power and besides made it compulsory for the corporate organic structures to describe yearly every bit good as semi yearly sing their public presentation. ( SEBON, Annual Report, 2011 ) .
After the origin of the Securities Exchange Centre ( SEC ) , portions of assorted fabrication, trading and banking companies listed on SEC. Interestingly, the listed portions were dominated by public endeavors during this phase. Between 1984 and 1990, 42 companies were listed, out of which more than 25 companies had some signifier of authorities ownership ( Bhusal 2010 ) . However, after the democracy, the tendency has wholly changed and the listed figure of companies reached at 207 by the terminal of FY 2010/11[ 3 ], while the authorities ownership companies had decreased due to the denationalization that took topographic point in different planning phase of denationalization act ( Maharjan, 2010 ) .
2.5.1 Current Structure of Capital Market in Nepal
After the constitution O degree Fahrenheit SEBON in 1993, equity market grew quickly. In Fiscal twelvemonth ( FY ) 2010/2011 47 companies, consisting seven commercial Bankss, 21 development Bankss, 10 finance companies, two insurance companies and one hydropower company had issues portions for the entire sum of Rs. 6777.2 million.
During the FY 2012, SEBON prioritized the established of basic substructure and development of related ordinance sing Central Depository system ( CDS ) , Common financess and Credit Rating Company ( CRC ) ( SEBON, Annual Report, 2010/11 ) . On the same clip, SEBON had approved 16 companies for public issue worth Rs. 2028.44 Million.
Entire par value of listed portions in mid September 2012 is Rs.198257.83 Million, which had a market capitalisation of Rs.399586.48 Million. As on same clip, 223 companies have listed in NEPSE.
As on mid September, bond market hold every bit small as 13.8 per centum of entire issue in capital market, where as equity constitutes 86.1 per centum and merely 1 % is preferable stock ( NEPSE, 2012 ) .
Further, of the listed bonds, 82 per centum are authorities issued and merely 18 per centum are corporate bonds ( NEPSE, 2012 ) .
Figure: Capitalization of Nepali Capital Market
Beginning: NEPSE Database, 2012 and the Author.
2.6 Research Gap
Although some really valuable researches in the field of capital market have been done so far. There is still a great chance and to research and placing new informations about the capital market of Nepal.
Presents, Nepali portion market has entered to the new skyline. Its size and market capitalisation are turning twenty-four hours by twenty-four hours. , SEBON has ever stressing the of import of capital market, which has changed the investor ‘s vision. The range of NEPSE has changed since its gradual betterment of substructure and extra of common financess and market shaper. New Byelaws are being established to command stock market monetary value. Therefore, there is demand to analyse the monetary value behavior theory in Nepal with changed scenario. Obviously Nepali capital market has changed in many sense comparison to 2006/07.
Nepal is least developed state categorized by United Nation in 2010. So the Nepali capital market is genuinely an under develop market but it is important in footings of the grade of development, volumes of trading and in footings of its enormous growing potency.
Chiefly this research will make full the spread between the old research with updated capital market informations and scenario and types of market efficiency that exist in present Nepali capital market.
This will done on the footing that it has developed and more financially literate people has been actively involved in capital market, which had changed capital market scenario from rumor based, as described by old research, to analyse based.