A Brief Introduction to the Dhaka Stock Exchange

A Brief Introduction to the Dhaka Stock Exchange

The Dhaka Stock Exchange is the prime stock exchange of Bangladesh established in 1954 in Motijheel. Stock exchanges started in Bangladesh with the Dhaka Stock Exchange.
Evolution of the Dhaka Stock Exchange

The need to develop a new stock exchange in Bangladesh was realized by the government of Bangladesh ever since Calcutta Stock Exchanges had stopped the transactions in Pakistani shares and securities.
The Dhaka Stock Exchange basically started with the formation of the Provincial Industrial Advisory Council.
Initially it was named the East Pakistan Stock Exchange Association Ltd. It was revised in 1964 and since then it has used the present name.
Although the Dhaka Stock Exchange was incorporated in 1954 it started trading formally from 1956.
Trading in the Dhaka Stock Exchange discontinued for a span of five years following the liberation war of 1971. Trading was regained from 1976.
In 1976, there were nine listed companies in Dhaka Stock Exchange with a paid up capital of Tk 137.52 million.
The Dhaka Stock Exchange actually witnessed high growth in 1983 when the market capitalization reached Tk 812 million.
By 1987, there was a spurt in the market size with the number of listed companies shooting up to 92.
With the opening up of the economy in the 90s the Dhaka Stock Exchange also rapidly developed.
Structure of the Dhaka Stock Exchange
By 2001 the number of listed securities in the Dhaka Stock Exchange was 244, number of listed companies was 224, number of listed debentures was 10, the number of shares issued by the listed companies was 666,553. The number of Mutual Funds were 72,250 and the market capitalization was Tk 72,168 million.
Nature of Dhaka Stock Exchange
The Dhaka Stock Exchange was a physical stock exchange in its initial days when trading took place in the open outcry system. But with the advent of new technology, the traditional mode of trading was abolished and was replaced by a fully automated computerized Stock Exchange. The trading session occurs in Five parts- the pre-opening session, opening session, continuous or regular trading session, closing session or post-closing session.
Functions of the Dhaka Stock Exchange
The following are the functions of the Dhaka Stock Exchange:

• Listing of Companies
• Providing screen based automated trading of securities.
• Settlement of trading following the Settlement of Transactions Regulation.
• Market Administration and Control
• Market Surveillance
• Publication of monthly review
• Monitoring the activities of the listed companies following the Listing Regulations.
• Formation of the Investors' Grievance Cell
• Formation of the Investors' Protection Fund
• Online Notification of price sensitive and other information about the listed companies.

References

1.                                          A. R. Chowdhury, “Statistical properties of daily returns from Dhaka Stock Exchange,” The Bangladesh Development Studies, vol. 22, no. 4, pp. 61–76, 1994.

2.                                          P. Branes, “Thin trading and stock market efficiency: a case of the Kuala Lumpur stock exchange,” Journal of Business Finance & Accounting, vol. 13, no. 4, pp. 609–617, 1986.

3.                                          K. C. Chan, B. E. Gup, and M.-S. Pan, “An empirical analysis of stock prices in major Asian markets and United States,” The Financial Review, vol. 27, no. 2, pp. 89–307, 1992.

4.                                          J. P. Dickinson and K. Muragu, “Market efficiency in developing countries: a case study of the Nairobi stock exchange,” Journal of Business Finance & Accounting, vol. 21, no. 1, pp. 133–150, 1994.

5.                                          K. Ojah and D. Karemera, “Random walks and market efficiency tests of Latin American emerging equity markets: a revisit,” The Financial Review, vol. 34, no. 2, pp. 57–72, 1999.

6.                                          Y.-L. Cheung, K.-A. Wong, and Y.-K. Ho, “The pricing of risky assets in two emerging Asian markets- Korea and Taiwan,” Applied Financial Economics, vol. 3, no. 4, pp. 315–324, 1993.

Conclusions

The assumption that stock returns series are random is basic to the Efficient Market Hypothesis and Capital Asset Pricing Models. The results of the analysis differ from the findings of idealized efficient market. So, the overall findings of this research are also in line with the past research outcomes on DSE. The frequency distribution of the stock prices in DSE does not follow a normal or uniform distribution. This result is confirmed by the nonparametric K-S test. The results of run test and autocorrelation coefficient tests indicate that the nonrandom nature of the series violates the assumption of null hypothesis that the market is efficient in weak form. Further test on the predictability of past values in the series using time series statistical techniques such as autoregression model confirms the previous findings, and the results are consistent with all the categories of the eleven policy groups. In overall analysis, it is observed that all of the existing policy of DSE and SEC cannot ensure market efficiency, not even weak form. Continuous and frequent policy changes have no impact on market efficiency in DSE. Present policies of DSE cannot ensure proper return in the market. Both types of active and passive investors are not behaving randomly as investors’ confidence in the policy of DSE is very low. Therefore acute attention must be given on the issues of policy reform and formulation such that the policies can play a good role to improve the reliability and efficiency of DSE.

The Risk-Return Model

The study mainly considers the daily market returns as individual variable in time series analysis. DSE prepares daily price index from daily weighted-average price of daily transaction of each stock. Daily market returns (Rmt) are calculated from the daily price indices such as follows:

………………………1

where Rmt market return in period p; PI:  price index at day t: the price index at period P t-1 and In: natural log.

This calculation of market return is used in the efficiency test and systematic risk-return analysis. The reasons to take logarithm returns are justified both theoretically and empirically. Theoretically, logarithmic returns are analytically more tractable when linking together 11 period returns to form returns over longer intervals. Empirically, logarithmic returns are more likely to be normally distributed which is a prior condition of standard statistical techniques [22]. In case of market depth analysis, total market turnover is divided by total market capital to measure the frequency of regular transaction and liquidity of the market.

Background of Dhaka stock exchange

East pakisthan  stock exchange ltd. Was finally named as Dhaka stock exchange (DSE) on 14 may 1964.

Although incorporated in 1954, formal trading started in 1956.

Prior to incorporated in 1971, the number of listed companies in DSE was 196 with a total paid up capital of TK. 4 billion.

The total number of listed securities is now 378.

Nature of Dhaka stock exchange

There are four markets in the system –

Public market

Only trading of market lot share is done here though automatic matching.

Spot market

Spor transaction are done here through automatic matching which must be settled within 24 hours.

Block market

A place where bulk quantities of shares are traded through pick and fill basis.

Odd lot market

Odd lot scripts are traded here based on pick and fill basis.

Policies of DSE

DSE can introduce automate monitoring systems that may control price manipulation, malpractices and inside trading.

It can make sure all the listed companies publish their annual reports with actual and proper information that can ensure the interest of the investors.

To force the listed companies to declare and pay regular dividends through conducting annual General meeting.

To make arrangement to set up merchant banks investment banks and floatation of more  mutual funds particularly in the private sectors.

More banks, insurance companies and other financial institution should be encouraged to deal in share business directly.

The management of DSE should be vested with professionals and should not in any way be linked with the ownership of stock exchange and other firms.

To train the investors about fundamentals to deal in share transactions.

To punish the member brokers for branching of contract.