A STUDY ON RELATIONSHIP BETWEEN STOCK

MARKET AND ECONOMIC GROWTH IN NEPAL

A Thesis

Submitted By:
Bikash Karki
Shanker Dev Campus
T.U. Reg. No: 7-1-7-1144-2006
Exam Roll No: 391018
Roll No: 669/068

Submitted To:
Research Department of
Shanker Dev Campus
Tribhuvan University

In Partial Fulfillments of the Requirements for the Degree of

Master in Business Studies (MBS)

Putalisadak, Kathmandu
March, 2016
 RECOMMENDATION
This is to certify that the thesis

Submitted by:
Bikash Karki
Entitled:

"A STUDY ON RELATIONSHIP BETWEEN STOCK MARKET AND

ECONOMIC GROWTH IN NEPAL" has been prepared as approved by this
department in the prescribed format of faculty of Management. This thesis is
forwarded for examination.

……………………………. ………………………………
Prof. Prakash Singh Pradhan Prof. Dr. Kamal Deep Dhakal
(Thesis Supervisor and Campus Chief) (Head, Research Department)

……………………
Prakash Sapkota
(Thesis Supervisor)
 VIVA-VOCE SHEET
We have conducted the viva-voce of the thesis presented

By:

BIKASH KARKI
Entitled:

"A STUDY ON RELATIONSHIP BETWEEN STOCK MARKET AND

ECONOMIC GROWTH IN NEPAL" And found the thesis to be the original
work of the student and written according to the prescribed format. We
recommend the thesis to be accepted as partial fulfillment of the requirement for
the degree of

Master of Business Studies (MBS)

Viva-Voce Committee

Head, Research Department ……...…………………..

Member (Thesis Supervisor) ……...…………………..

Member (Thesis Supervisor) ……...…………………..

Member (External Expert) ……...…………………..

 DECLARATION
I hereby declare that the work reported in this thesis entitled "A Study On
Relationship Between Stock Market And Economic Growth" submitted to
office of the Dean Faculty of Management, Tribhuvan University, is my original
work done in the form of partial fulfillment of the requirement for the degree of
Master of Business Studies (M.B.S) under the supervision of Prof. Prakash Singh
Pradhan and Prakash Sapkota of Shanker Dev Campus, T.U.

…………………………….

Bikash Karki
Sankher Dev Campus
Campus Roll No.: 669/068
T.U. Regd. No.: 7-1-7-1141-2006
 ACKNOWLEDGEMENT

I am pleased to present this dissertation for the partial fulfillment of the

requirement for the Master degree of Business Studies (M.B.S) which could
enhance the capabilities of students in the field of research work.

I am highly grateful and indebted to my honorable supervisors Prof. Prakash

Singh Pradhan and Mr. Prakash Sapkota for their guidance, encouragement and
possible help in the smooth conduction of this study. I would also like to thank
Prof. Dr. Kamal Deep Dhakal, Head of Research Department of Sankher Dev
Campus and Mr Jogendar Goet for great support.

I want to give thanks for the staff members of Nepal National Library, Shanker
Dev Campus Library who provide the reference and regarding materials during the
period of research.

My thankfulness also goes to my friends Mr. Dablu Karki and Mr. Sanjeev Lama
for supported me greatly in thesis writing.

I extend my warm thanks to my family member and my friends for their

continuous inspiration and support during the entire period of the study.

Finally I would like to express a warm regard to all the concerned people who
helped and directed me for the successful completion of my Thesis.

Bikash Karki
 TABLE OF CONTENTS

Recommendations

Viva-Voce Sheet

Declaration

Acknowledgement

Table of Contents

Abbreviations

List of Tables

List of Figures

Page No.

CHAPTER – I

INTRODUCTION
1.1 General Background of the study 1

1.1.1 Introduction of NEPSE 5

1.1.2 General Economic Review of Nepal 6

1.1.3 Definition of Key Terms 9

1.2 Statement of the Problems 10

1.3 Objective of the Study 12

1.4 Significance of the Study 12

1.5 Limitation of the Study 13

1.6 Organization of the Study 13

 CHAPTER – II

REVIEW OF LITERATURE
2.1 Theoretical Framework 15

I. Indicators of Stock Market Development 19

II. Indicators of Economic Growth 20

2.2 Review of Empirical Works 22

2.3 Research Gap 32

CHAPTER – III

RESEARCH METHODOLOGY
3.1 Research Design 33
3.2 Nature and Sources of Data 33
3.3 Selection of Study Period 34
3.4 Method of Analysis 34
3.4.1 Trend Analysis 34
3.4.2 Arithmetic Mean 35
3.4.3 Standard Deviation 35
3.4.4 Coefficient of Variation 36
3.4.5 Correlation Analysis 36
3.4.5.1 Coefficient of Multiple Determinations (R2) 37
3.4.6 Regression Analysis 37
3.4.6.1 Regression Constant 40
3.4.6.2 Regression Coefficients 40
3.4.6.3 Standard Error of Estimate (SEE) 40
3.5 Limitation of the Study 40
 CHATPER – IV

PRESENTATION AND ANALYSIS OF DATA

4.1 General Trend Analysis 43

4.2 Summary Statistics 47

4.3 Correlation Analysis 48

4.4 Regression Analysis 51

4.5 Major Findings 57

CHAPTER - V

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary 60

5.2 Conclusion 61

5.3 Recommendations 62

Bibliography

Appendix
 ABBREVIATIONS
CBS : Central Bureau of Statistics
CF : Capital Formation
CI : Change in Inventory in the Economy
CS : Capital Stock Growth
et al : and others
FY : Fiscal Year
GDP : Gross Domestic Product
GoN : Government of Nepal
HMG/N : His Majesty's Government/Nepal
IMF : International Monetary Fund
Log : Logarithms
MC : Market Capitalization
NEPSE : Nepal Stock Exchange
NIDC : Nepal Industrial and Development Corporation
NRB : Nepal Rastra Bank
PG : Productivity Growth
PM : Equity Amount Issued Approved in Primary Market
Rs. : Nepalese Rupees
SEBO/N : Securities Board, Nepal
SEE : Standard Error of Estimate
SPSS : Software Program for Social Sciences
TO : Turnover
V : Volatility
VT : Value Traded
 LIST OF TABLES
Table No. Page No.

Table 1.1 : Market Timings 5

Table 1.2 : Brokerage Commission 6
Table 2.1 : Growth and contemporaneous financial
Financial indicators, 1960-1989 23
Table 2:2 : Reviews of Major Nepalese Studies 28
Table 4.1 : Summary Statistics: Annual Averages
2007/08 – 2014/15 47
Table 4.2 : Correlation Matrix 49
Table 4.3 : Regression of Gross Domestic Product (GDP) on
Market Capitalization (MC), Value Traded (VT),
Turnover (TO), Volatility (V) and Size of the
Primary Market (PM) 52
Table 4.4 : Regression of saving (S) on market capitalization
(MC), Value Traded (VT), Turnover (TO), Volatility
(V), and Size of the Primary Market (PM) 54
Table 4.5 : Regression of Investment (I) on Market Capitalization
(MC), Value Traded (VT), Turnover (TO), Volatility
(V), and Size of the Primary Market (PM) 55
Table 4.6 : Regression of Capital Formation (CF) on market
Capitalization (MC), Value Traded (VT), Turnover
(TO), Volatility (V), and Size of the Primary
Market (PM) 56
 LIST OF FIGURES
Figure No. Page No.

Figure 2.1 : Financial Markets and Growth 16

Figure 4.1 : Presentation of Log Values of the Primary

Issue Amount (PM) and NEPSE INDEX

Over the study period 44

Figure 4.2 : Presentation of log Values of Market

Capitalization (MC), Value Traded (VT)

And Size of the Primary Market (PM) for

The period 45

Figure 4.3 : Comparison of the log value of size of the

Primary market (PM) and NEPSE INDEX

With the log values of Gross Domestic Product

(GDP), Savings (S), Investment (I), and Capital

Formation (CF), for the study Period 46

 CHAPTER -I

INTRODUCTION
1.1 General Background
Traditional theorists believed that stock market in general has no correlation
with economic growth. This proposition aroused studies on finding the effect of
stock market and economic growth. In a developing economy like Nepal, the
development and growth of stock markets have been widespread in recent
times. Despite the size and illiquid nature of stock market, its continued
existence and development could have important implications for economic
activity. Even in less developed countries capital markets are able to mobilize
domestic savings and able to allocate funds more efficiently. Thus stock
markets can play a role in inducing economic growth in less developed country
like Nepal by channeling investment where it is needed from public.
Mobilization of such resources to various sectors certainly helps in economic
development and growth. Stock market development has assumed a
developmental role in global economics and finance because of their impact
they have exerted in corporate finance and economic activity.

Nepal is one of the developing country in the world with about 23% of its
population are living below the poverty line. Nepal continues to be a
predominantly agricultural economy with around three-fourth (3/4) of its
workforce employed in the agricultural sector and accounting only one-third
(1/3) of GDP. The Manufacturing sector employed just 6.6% of the total
workforce. The contribution of manufacturing to total GDP was a minimal.
Industrial activity mainly involves the processing of agricultural products
including jute, sugarcane, tobacco, ghee, soap, noodles, matches, shoes,
chemicals, cement, bricks etc. industrial growth rate is not sufficient for general
growth of the national economy. But it can be said that industrialization is the
back-bone of the national economy and it is important factor for achieving the
basic objective or country's economic and social progress.

One of the basic elements in achieving a self-reliant growth of the economy

and far sustaining the desired level of economic development is an accelerated
rate of investment or capital formation in the economy. The rate of investment
or capital formation depends upon the efficiency of the financial system. A
developed financial system is a hallmark of any free enterprises of mixed
economy. The markets, instruments and institutions that comprise this system
facilitate the efficient production of goods and services and there by
contributing the society's well being. The financial systems or markets perform

1
this function by channeling the nation's saving into best uses. It does this by
bringing together those who have surplus funds to lend and those who wish to
borrow to finance their expenditures.

Nepalese Stock Market is very small as compared to other neighbor countries.

Capital plays a vital role in the economic development of a country. Being a
capital deficient country, Nepal has to make every endeavor to mobilize
available capital effectively. Securities are financial assets. Securities markets
are mechanism created to facilitate the exchange of financial assets. Therefore,
the market exists in order to bring together the buyers and sellers of Securities.
Capital market is the mechanism designed to facilitate the exchange of
financial assets by bringing orders from buyers and sellers of securities
together. Stock market has been global phenomenon in the present world
regardless of the size of any particular region.

Stock markets contribute to mobilization of domestic savings by enhancing the

set of financial instruments available to savers to diversify their portfolios.
Capital Market is also plays important role towards consolidation and
mobilization of small savings scattered across the nation. By observing the
central role played by capital market in economic developing countries have
given enough space to its development and expansion.

The trading of shares of stocks takes places in the stock market, on one hand, it
directly provides liquidity to the investors who provide funds for the
establishment of the productive enterprises, and on the other, encourage savers
to save more and enterprising economic units to start productive ventures.
Nepal, the capital deficient economy, requires a huge amount of investment in
productive activities for her rapid economic development. The stock market
can play vital role by encouraging and channeling the saving to provide the
entrepreneurs for investment in profitable projects in the Nepalese economy.
The development of economy requires the productive activities, which in turn
is the result of the investment ventures in productive enterprises. The
establishment of these enterprises needs a huge amount of funds.

There are mainly two sources of financing the productive enterprises the
internal and external sources. The internal financing has the limited scope
because of the limited resources and risk associated with investment so now a
days, the external financing the method of financing an enterprises through the
financing market, has become the most important and popular sources of
financing for fostering the productive activities in the economy. Now all the
economic units including the householder and government have to rely on
external financing also. The introduction and developments of financial assets

2
is the most important attributes of the external financial. Thus, stock market is
the most important component of the financial market (market for financial
assets) is a must for the development of economy. In the Nepalese context, the
external financing has the limited scope because of the least developed
financial market in the economy. The savers and investors often are the same in
the Nepalese economy, which is one of the discouraging factors for the rapid
growth of investment in productive activates.

The basic functions of stock market are still top provide and allocate capital
funds to firms with profitable investments opportunities and to offer an avenue
to liquidity for individuals to invest current income or borrow against future
income and there by achieve their preferred time pattern of consumption.
Because investing involves uncertainty, capital market also provides a means
for transferring risk among the parties to this transaction. The stock market and
economic activity move in similar cyclical patterns. In the Nepalese economy,
the demand and supply of funds for investment in productive enterprises is low
due to the absence of mechanism for transferring risk which, in turn, may be
attributed to the absence of well developed stock market.

Although, some analysts view stock market in developing countries as

"casinos" that have little positive impact on economic on economic growth,
recent obedience suggest that stock market can give a big boost to economic
development for the developing country like Nepal. Stock market is one of the
organisms of the economy.

Stock market may affect economic activity through the creation of liquidity
many profitable investments require a long-term commitment of capital, but
investors are often reluctant to relinquish control of their saving for long
periods. Liquid equity markets make investment less risky and more attractive.
They need access to their savings or want to alter their portfolios. At the same
time, company enjoys permanent access to capital raised through equity
issuance. By facilitating longer term, more profitable investment liquid markets
improve the allocation of capital and enhance prospect for long term economic
growth. Further by making investments less risky and more profitable, stock
market liquidity can also lead more investment. But succinctly, investors will
come if they can leave. Nepalese stock market is least developed from these
points of view. There is a virtual absence of liquidity, which discourages
further investment in economy.

Nepalese capital market, which has a number of institutional bodies like

Securities Board of Nepal (SEBON), Nepal stock exchange (NEPSE),
shareholders association Nepal (SAN) and listed companies are in existence.

3
Securities Board of Nepal (SEBON) has been regulating and monitoring about
350 companies including securities Market, Listed Companies, Central
Depository Company, Depository Members, Mutual Investment Fund, Credit
Rating Institution and Securities Traders with day by day expansion of capital
market.

In Nepalese capital market there are 1 stock Exchange, 14 Merchant Bankers, 1

Central Depository Company, 45 Depository Members, 1 Credit Rating
Company and 50 Share Brokers.

As the first financial institution in Nepal, Tejaratha Adda was established in

1993 B.S. from government side. But it only provided loan in favor of
government employees with minimum interest rate. Although Nepal Bank was
established in 1984 B.S. it could not generate enough funds for business of
industrial purpose. It only provided short-term loan for individual and business
institution by pledging collateral. After the establishment of Nepal Rastra Bank
in 2013 B.S., as central bank of the country, it was funded as a base of capital
market. It was also authorized to issue government securities (like government
bonds, treasury bills, national saving certificates etc) to collect the national
debt. Without participating private sector capital market could not be
developed appropriately considering this, Nepal industrial development
corporation (NIDC) was established in 2016 B.S. The basic function of NIDC
was to encourage private sectors for conducting industrial activities. It also
helps for the improvement and modernization of private sectors by providing
economic and technical subsidies (assistance) employee provident fund (209).
Rastriya Beema Sasthan and Agriculture Development Bank (2024) were
established in financial sector. However, it could not help the institutional
development of security exchange because the basic objectives of these
institutions were not related to securities exchange activities. Thus to provide
the investment opportunities to potential investors and collection and
mobilization of funds for industrial purpose, the need of independent organized
institution has been felt at that time. Security exchange center (SEC) was
established in 1976.

The basic functions of stock market are still to provide and allocate capital
funds to firms with profitable investment opportunities and to offer on avenue
of liquidity for individuals to invest current income for borrow against future
income and there by achieve their preferred time pattern of consumption
because investing involves uncertainty, capital market also provoke a means
for transferring risk among the parties to these transaction. The stock market
and economic activities move in similar cyclical patterns. In Nepalese

4
economy, the demand and supply of funds for investment in productive
enterprise is low duet to the absence of mechanism for transferring risk which
in turn, may be attributed to the absence of well developed stock market.

1.1.1 Introduction of NEPSE

Nepal Stock Exchange, in short NEPSE, is established under the company act,
operating under Securities Exchange Act, 1983. The basic objective of NEPSE
is to impart free marketability and liquidity to the government and corporate
securities by facilitating transactions in its trading floor through member,
market intermediaries, such as broker, market makers etc. NEPSE opened its
trading floor on 13th January 1994. Governments of Nepal, Nepal Rastra Bank,
Nepal Industrial Development Corporation are the members and shareholders
of NEPSE.

The history of securities market began with the floatation of shares by

Biratnagar Jute Mills Ltd. and Nepal Bank Ltd. in 1937. Introduction of the
Company Act in 1964, the first issuance of Government Bond in 1964 and the
establishment of Securities Exchange Center Ltd. in 1976 were other
significant development relating to capital markets. Securities Exchange Center
was established with an objective of facilitating and promoting the growth of
capital markets. Before conversion into stock exchange it was the only capital
markets institution undertaking the job of brokering, underwriting, managing
public issue, market making for government bonds and other financial services.
Nepal Government, under a program initiated to reform capital markets
converted Securities Exchange center into Nepal Stock exchange in 1993.

Trading on equities takes place on all days of week (except Saturdays and
holidays declared by exchange in advance). On Friday only odd lot trading is
done. The market timings of the equities are shown in following table:-

Table 1.1: Market Timings

Market Open Market Close

Normal Trading 12:00 Hours 15:00 Hours

Odd Lot Trading 12:00 Hours 13:00 Hours

Source: www.nepalstock.com

Note: - The exchange may however close the market on days other than
schedule holidays or may open the market on days originally declared as

5
holidays. The exchange may also extend, advance or reduce trading hours
when it deems fit necessary.

NEPSE facilitates trading Shares (Equity Shares and Preference Shares),

Debentures, Government Bonds and Mutual Funds.

Rate of Brokerage for equity, Brokerage for Government Bond and Brokerage
for all other stocks which in not listed in 1 and 2 are given below:-

Table 1.2: Brokerage Commission

For Equity For Government Bond For all Others Stocks

S.No Trading Amount Broke Trading Amount Broke Trading Amount Broke
rage rage rage
% % %

A Up to
Up to 50,000 1 0.20 Up to 50,000 0.75
5,00,000

B > 50,000 & < > 5,00,000 & > 50,000 & <
0.9 0.10 0.60
5,00,000 < 50,00,000 50,00,000

C > 5,00,000 &

0.8 > 50,00,000 0.05 > 50,00,000 0.40
< 10,00,000

D > 10,00,000 0.7

Source: www.nepalstock.com

The number of companies listed in Nepal Stock Exchange Limited, which

stood at 233 at the end of Fiscal Year 2013/14 totaled to 232 by the first eight
months of FY 2014/15 after merger of additional listing and listed companies.
Likewise, the total number of listed corporate development bonds by mid-
February of FY 2014/15 has reached 21 with additional development bonds
worth Rs. 1.45 billion of newly listed three companies. The Market
capitalization value by the end of FY 2013/14 was Rs. 1057.16 billion.
(Economic Survey 2014/15)

1.1.2 General Economic Review of Nepal

Nepal's economy is in developing phase. So in order to speed up this phase of
economic development, financial sectors may have crucial role, as they
accumulate scattered savings for capital formulation. The public investors are
interested to invest their money in the common stocks of financial institutions.
As a result, such institutions shares are being traded among the investors in the
6
secondary market, in larger volume every day. Securities Board Nepal and
NEPSE are the main bodies to make the stock market as competent and
efficient as possible. Actual efforts have been made to develop the Nepalese
stock market with the promulgation of securities transaction Act 1983, which
was subjected to frequent amendments.

The economic growth rate over the last decade has not been satisfactory.
Although the growth rate recorded over 5.0 percent in fiscal years 2007/08 and
2013/14, growth in other fiscal years hovered around 3 to 4 percent. The
average economic growth rate of the country in the past decade merely stood at
4.1 percent at basic prices. Likewise, the average growth rates of agriculture
and non-agriculture sectors remained at 3.2 percent and 4.7 percent
respectively in the previous decade.

The average growth rates of industry and services sectors under the non-
agriculture sector stood at 2.9 percent and 5.2 percent respectively in the last
ten years. Analysis of sector-wise economic growth for the last decade reveals
that though the growth rate of the services sector remained satisfactory,
industry sector’s growth rate did not record as such. Except for three fiscal
years, services sector recorded a growth of over 5.0 percent in the other fiscal
years.

During this period, the growth rate of agriculture sector was much more
influenced mainly by the climate factor and supply of seeds and fertilizers,
while the industry sector under the non-agriculture sector was greatly
influenced by the investment environment, labor problems, energy crisis, and
prolonged political transition among others. The structure of Nepalese
economy has been changing gradually. Contribution of agriculture and industry
sectors to GDP showed a declining trend while that of services sector showed
the opposite. From the sector-wise perspective, the contribution of primary,
secondary and tertiary sector contribution to nominal GDP are estimated to
remain at 33.7 percent, 14.1 percent and 52.3 percent respectively.

While classifying GDP into agriculture and non-agriculture sectors,

contribution of the agriculture sector showed declining trend while the non-
agriculture sector showed the opposite. Contribution of the agriculture sector to
GDP at current prices stood at 37.4 percent in FY 2001/02, while it has come
down to 33.1 percent in current fiscal year 2013/14.

The ratio of consumption to GDP in current fiscal year climbed to 91.1 percent
from 89.9 percent in the previous year. The shares of the private sector,
government sector and non-profit institutions in final consumption expenditure

7
in current fiscal year stood at 85.7 percent, 12.3 percent and 2.0 percent
respectively. On private consumption side, shares of food items, nonfood items
and services have been remained at 65.3 percent, 23.9 percent and 10.8 percent
respectively.

The share of gross domestic saving to GDP is estimated to drop by 1.2

percentage point compared to that of previous fiscal year and reaching to 8.9
percent in current fiscal year amounting to Rs. 172.03 billion at current prices.
The ratio of Gross National Saving to GDP is estimated to reach at 46.4 percent
to Rs. 895.68 billion in the current fiscal year against the growth rate of 40.3
percent in the previous year.

Nepalese per capita GDP is estimated to have reached at Rs. 69,919 in current
fiscal year, which is equivalent to US $703. The total expenditure of GoN had
increased by 5.7 percent to Rs.358.63 billion in FY 2012/13. This is estimated
to increase by 44.2 percent to Rs. 517.24 billion in current fiscal year 2013/14.
Of this, recurrent and capital expenditure is estimated to remain at Rs. 353.42
billion, and Rs.84.10 billion respectively.

Revenue mobilization that grew by 21.1 percent in FY 2012/13 is estimated to

Rs. 354.50 billion in current fiscal year recording an increase of 19.7 percent.
Similarly, tax revenue is estimated to increase by 21.4 percent to Rs.314.64
billion in current fiscal year as compared with that of the previous fiscal year.
Likewise, non-tax revenue is estimated to grow by 8.3 percent to Rs. 39.86
billion. The consumer price index based inflation rate that stood at 10.2 percent
in the first eight months of FY2012/13 has slightly dropped to 8.9 percent
during the same period of current fiscal year 2013/14.

Similarly, price growth index of food and beverage group in annuals point-to-
point remained at 10.8 percent during the first eight months of current fiscal
year while that of nonfood items and services group has remained at 7.1
percent. The growth rates of price indices of these groups had stood at 11.3
percent and 9.3 percent respectively during the corresponding period of the
previous fiscal year.

Source:http://www.nepalstock.com/uploads/files/reports/20b0c000e358fb3dd1e
b7 c91140fd7d1.pdf

At present the Nepalese economy are affected by earthquake. This massive

earthquake affected overall sector, some of the data are presented below:-

• On April 25, 2015, a major earthquake occurred at shallow depth with a

magnitude of 7.8 in central Nepal causing widespread destruction. There

8
 were several aftershocks as well as a subsequent earthquake event of
magnitude 7.3 on May 12.
• A combined 9,000 lives were lost, making this the worst disaster in
Nepal’s history in terms of human casualties. An assessment of the
impact shows that Nepal’s recovery needs amount to the equivalent of a
third of its economy.
• The Post Disaster Needs Assessment prices the damage at US$ 5.15
billion, losses at US$ 1.9 billion and recovery needs at US$ 6.6 billion.
• Early estimates suggest that an additional 3 percent of the population
has been pushed into poverty as a direct result of the earthquakes. This
translates into as many as a million more poor people. The economic
growth rate in FY 2014-2015 is expected to be the lowest in eight years,
at 3.04 percent.

Source: http://www.worldbank.org/en/news/press-release/2015/06/16/nepal-
quake-assessment-shows-need-effective-recovery-efforts

Nepalese economy is also badly affected by Terai Strike, Terai-Madesh

Political parties are disagreed with current constitution and they make
disturbance in all sector that is why it can be assumed that the present
economic growth of the country could easily be hampered.

1.1.3 Definition of Key Terms

The financial statements published by different organizations have its own

format for publishing the financial data on a more or less uniform basis. The
following terms may have different meanings in different circumstance and
under different conditions. It is, therefore, desirable to define some key terms
so as to avoid misunderstanding.

• Gross domestic product (GDP) is the monetary value of all the finished
goods and services produced within a country's borders in a specific
time period. Though GDP is usually calculated on an annual basis, it can
be calculated on a quarterly basis as well. GDP includes all private and
public consumption, government outlays, investments and exports
minus imports that occur within a defined territory. Put simply, GDP is a
broad measurement of a nation’s overall economic activity.

• Savings: - Savings means excess of income over expenditure. It is

generally equal to a nation's income minus consumption and
government purchases. In economics, a country's national savings is the
sum of private and public savings.

9
 • Investments: - In national income analysis it is the value of that part of
economy output for any period that takes the form of new structure, new
producers, durable equipment, and change in inventories. Investment or
investing is a term with several closely-related meanings in business
management, finance and economics, related to saving or deferring
consumption. An asset is usually purchased, or equivalently a deposit is
made in a bank, in hopes of getting a future return or interest from it.
• Capital Formation: - Capital formation is a term used in national
accounts statistic and macro economics. It basically refers to the net
additions to the (physical) capital stock in accounting period or, to the
value of the increase of the capital stock; though it may occasionally
also refer to the total stock of capital formed.
• Market capitalization: - Market Capitalization is the total market value
of the shares outstanding of a publicly traded company; it is equal to the
share times the number of shares outstanding. As outstanding stock is
bought and sold in public markets, capitalization could be used as
a proxy for the public opinion of a company's net worth and is a
determining factor in some forms of stock valuation. The investment
community uses this figure to determine a company's size, as opposed to
sales or total asset figures.
• Value Traded: - Value traded is the value of the shares traded in the
domestic exchanges.
• Turnover: - Turnover equals to the value of the trades of domestic
shares on domestic exchanges divided by the value of listed domestic
shares.
• Volatility: - Volatility or in another word Standard Deviation is the
Measure of the state of instability. It measures the movement of the
stock market index during the certain period around the mean value.
Specifically, it is the variance of the market index during a certain
period.
• Size of Primary Market: - Size of primary market is the amount of
capital mobilization through the primary market during the study period.

1.2 Statement of the Problems

This study focuses on the relationship between stock market and economic
growth. Both theoretically and statistically, outmost attempt is carried to fight
against the accusation, which describes stock market as casinos. Considerable
debate exists on the question. Is financial system important for economic
growth? Stock market is very important institution which plays a crucial role

10
for the economic development of the nation. The research focus the importance
once of financial system in mobilizing saving, formation of capital, expansion
of corporation and hence economic development.

Do stock markets affect overall economic development? Although some

analysts view stock markets as "casinos" that have little positive impact on
economic growth, recent evidence suggests that stock markets can give a big
boost to economic development.

Stock markets may affect economic activity through the creation of liquidity.
Many profitable investments require a long-term commitment of capital, but
investors are often reluctant to relinquish control of their savings for long
periods. Liquid equity markets make investment less risky and more attractive
because they allow savers to acquire an asset-equity and to sell it quickly and
cheaply if they need acce3ss to their savings or want to alter their portfolios. At
the same time, companies enjoy permanent access to capital raised through
equity issues. By facilitating longer-term, more profitable investments, liquid
markets improve the allocation of capital and enhance prospects for long-term
economic growth. Further, by making investment less risky and more
profitable, stock market liquidity can also lead to more investment. Put
succinctly, investors will come if they can leave.

There are alternative views about the effect of liquidity on long-term economic
growth; however, some analysts argue that very liquid markets encourage
investor myopia. Because they make it easy for dissatisfying investors to sell
quickly, liquid markets may weaken investor's commitment and reduce investor
incentives to exert corporate control by overseeing managers and monitoring
form performance and potential. According to this view, enhanced stock
market liquidity may actually hurt economic growth.

So, the study focuses of the relationship between stock market development
and economic growth in context of Nepal.

This present study is carried out to answer the following research questions:

• What is the relationship between stock market and economic growth?

• How can stock market influence the rate of economic growth?
• What are the major determinants of the stock price in NEPSE?
• What is the trend of Stock price and economic growth?
• Are investors are aware about impact of economic variables on the stock
price?

11
 • Does efficient stock market mobilize the saving effectively and help the
optimum allocation of saving.
• Do stock markets affect overall economic growth?

1.3 Objectives of the Study

The principal objective is to analyze the accusation, which describes the stock
market as the casino and present the different theoretical aspects and statistical
tools in an attempt to prove the relationship between stock market and
economic growth. In other words different economic indicators are used and
analyzed to visualize the relationship between stock market and economic
growth.

Specifically these are the main objectives of the study:

• To measure the relationship between stock market and economic

growth.
• To analyze the development of stocks market can accelerate the rate
of economic growth.
• To examine the role of stock market in saving, capital mobilization
and economic growth.

1.4 Significance of the Study

Stock market recognizes the situation of economy. When stock market is
booming the economy is good and when stock market is declining the economy
is bad. Stock markets have direct relation with the economic growth. Economic
growths come with more earning capacity, opportunities to save and also the
opportunity to invest. It must be noted that economic growth is, too a great
extent, dependent on the industrialization in a country.

It represents the study to find out the problem, prospects and growth in the near
future. What policies can be formulated, what regulatory acts are needed and
necessity of amendments regarding the rules and regulation to develop it and
make the market perfect functioning. The standard is one of the elements to
stock market development. Financial statement should maintain accordingly
which fulfill the requirement of related parties needed information.

This study will be useful to the university students who are curious to know
about the current status of Nepalese stock market, its growth, issues and
challenges for the development of stock market. Similarly, the
recommendations that this study intends to propose on the basis of its findings

12
are expected to be useful for the policy makers associated with the
development of capital markets.

1.5 Limitations of the Study

This study will have some limitations. Basically the study is done far partial
fulfillment of master of Business studies. Time constraints, financial problem
and lack of research experience will be the primary limitations and the study is
based on secondary data and only few years' data will be used for the study The
limitations of the study are given below:-

• Findings and suggestions may not be applicable exactly to other private

or public companies.
• Due to availability of limited information this study will not cover every
part of the performance aspects.
• This study is fully based on the secondary data. Reliability of the finding
depends upon the trustworthiness of the sources of data.
• Financial constraints and time are also the major limitations of the study.
• The study covers only the past and present state of stock market in
Nepal, hence does not make any prediction about the future.
• There are no sufficient for using various statistical tools for analysis of
data.

1.6 Organization of the Study

This study has been comprised of three chapters, each devoted to some aspects
of financial performance. The titles of each of these chapters are summarized
and the contents of each of these chapters of this study are briefly mentioned
here.

Chapter-I: Introduction
The first chapter of the study is introduction, which highlighted the basic
information of the research area, various problems, objectives, importance,
limitations and organization of the study with the subject matter consisting of
historical development of Tea industry in Nepal, a brief profile of the cited tea
manufacturing companies.

Chapter-II: Review of Literature

The second chapter of the study assures readers that they are familiar with
important research that has been carried out in similar areas by earlier scholars

13
in related areas. It also establishes that the study link in a chain of research that
is developing and emerging knowledge about concerned field.

Chapter-III: Research Methodology

The third chapter describes the research methodology adopted in carrying out
the present research. It deals with research design, sources of data, data
processing procedures, population and sample, period of the study, method of
analysis and financial and statistical tools.

Chapter-IV: Data Presentation and Analysis

The fourth chapter is concerned with presentation, analysis and interpretation
of data. The segment where the data required for the study are presented
analyzed and interpreted by using the tools and technique of financial
management such as ratio analysis and statistical tools i.e. coefficient of
variation, correlation coefficient and regression analysis in specified form to
meet the stated objectives of the study.

Chapter-V: Summary, Conclusion and Recommendation

The fifth and the final chapter are concerned with the suggestive framework
that consists with the overall findings, conclusions and recommendations of the
study.

Besides above chapters, this study paper consist a separate appendix and
bibliography for those materials and books which are used in the process of
preparing this thesis report. It also gives important suggestions to the concerned
organization for better improvement.

At the end of the chapters bibliography and appendix has been incorporated.

14
 CHAPTER – II

REVIEW OF LITERTURE
Review of literature means reviewing research studies or other relevant
prepositions in the related area of the study so that all the past studies, their
conclusions and deficiencies may be known and further research can be
conducted. The main reason for a full review of research in the past is to know
the outcomes of those investigations in area where similar concepts and
methodologies have been used successfully.

The first part of the chapter deals with the theoretical framework and the
second part are concerned with review of empirical works.

2.1 Theoretical Framework

A theoretical framework consists of concepts and, together with their

definitions and reference to relevant scholarly literature, existing theory that is
used for your particular study. The theoretical framework must demonstrate an
understanding of theories and concepts that are relevant to the topic of your
research paper and that relate to the broader areas of knowledge being
considered.
The theoretical framework strengthens the study in the following ways:

1. An explicit statement of theoretical assumptions permits the reader to

evaluate them critically.
2. The theoretical framework connects the researcher to existing
knowledge. Guided by a relevant theory, you are given a basis for your
hypotheses and choice of research methods.
3. Articulating the theoretical assumptions of a research study forces you
to address questions of why and how. It permits you to intellectually
transition from simply describing a phenomenon you have observed to
generalizing about various aspects of that phenomenon.
4. Having a theory helps you identify the limits to those generalizations. A
theoretical framework specifies which key variables influence a
phenomenon of interest and highlights the need to examine how those
key variables might differ and under what circumstances.

Such a view is not limited to the recent past; argues that the financial system
does not spur economic growth; financial development simply responds to
developments in the real sector. Thus, many influential economists give a very
minor role if any, to the financial system in economic growth (Robinson,
1952).

15
The stock market is expected to encourage savings by providing individuals
with an additional financial instrument that better meet their risk preferences
and liquidity needs. Better saving mobilization may increase the saving rate
(Levine and Zervos, 1996).

In principle stock market is expected to accelerate economic growth by

providing boost to domestic savings and increasing the quantity and quality of
the investment (Singh, 1997).

According to this vein of research, a well-functioning system is critical for

sustained economic growth. The following figure presents the theoretical
approach to finance and growth (Levine, 1997).

Market frictions

• Information costs
• Transaction Costs

Financial Markets and intermediaries

Financial Functions

• Mobilize savings
• Allocate resources
• Exert corporate control
• Facilitate risk management
• Ease trading of goods, services, contracts

Channels to growth

• Capital accumulation
• Technological innovation

Growth

Figure 2.1: Financial Markets and Growth

16
Stock markets also provide an avenue for growing companies to raise capital at
lower cost. In addition, companies in countries with developed stock markets
are less dependent on bank financing, which can reduce the risk of credit
crunch. Stock markets therefore are able to positively influence economic
growth through encouraging savings amongst individuals and providing
avenues for firm financing.

Considerable debate exists on the relationships between the financial system

and economic growth. Stock market is supposed to increase savings and
efficiently allocate capital to productive investments. This leads to increase in
the rate of economic growth. Stock markets contribute to mobilization of
domestic savings by enhancing the set of financial instruments available to
savers to diversify their portfolios. In doing so, they provide an importance
source of investment capital at relatively low cost (Dailami and Actin, 1990).

Efficient stock markets may also reduce the cost of information. They may do
so through the generation and dissemination of firm's specific information that
efficient stock price reveal. Stock markets are efficient if prices incorporate all
available information. Reducing the cost of acquiring information is expected
to facilitate and improve the acquisition of information about investment
opportunities and thereby improves resource allocation. Stock prices
determined in exchanges and other publicly available information may help
investor make better investment decisions and thereby ensure better allocation
of funds among corporations and as a result a higher rate of economic growth.

Stock market liquidity is expected to reduce the downside risk and costs of
investing in projects that do not pay off for a long time. With liquid market, the
initial investors do not lose access to their savings for the duration of the
investment project because they can easily, quickly and cheaply, sell their stake
in the company (Bencivenga and Smith, 1991).

Thus, more liquid stock markets could ease investment in long-term,

potentially more profitable projects, thereby improving the allocation of capital
and enhancing prospects for long-term growth. It is important to point out;
however, that theory is ambiguous about the exact impacts of greater stock
market liquidity on economic growth. By reducing the need for precautionary
savings, increased stock market liquidity may have an adverse effect on the rate
of economic growth.

Critics of the stock market argue that, stock market prices do not accurately
reflect the underlying fundamentals when speculative bubbles emerge in the
market (Binswanger, 1999).

17
In such situations, prices on stock market are not simply determined by
discounting the expected future cash flows, which according to the efficient
market hypothesis should reflect all currently available information about
fundamentals. Under this condition, the stock market develops its own
speculative growth dynamics, which may be guided by irrational behavior. This
irrationality is expected to adversely affect the real sector of the economy as it
is in danger of becoming the by-product of a casino.

Critics further argue that stock market liquidity may negatively influence the
corporate governance because very liquid stock market may encourage investor
myopia. Since investors can easily sell their shares, more liquid stock markets
may weaken investors.

Commitment and incentive for exert corporate control. In other words, instant
stock market liquidity may discourage investors from having long-term
commitment with firms whose shares they own and therefore create potential
corporate governance problem with serious ramifications for economic growth
(Bhide, 1994).

Critics also point out that the actual operation of the pricing and takeover
mechanism in well functioning stock markets lead to short term and lower rates
of long term investment. It also generates perverse incentives, rewarding
managers for their success in financial engineering rather than creating new
wealth through organic growth (Singh, 1997).

Therefore, prices of the stock market tend to be highly volatile and enable
profits within short periods. Moreover, because the stock market undervalues
long-term investment, managers are not encouraged to undertake long-term
investments since their activities are judged by the performance of a company's
financial assets, which may harm long run prospects of companies
(Binswanger, 1999).

In addition, empirical evidence shows that the takeover mechanism does not
perform a disciplinary function and that competitive selection in the market for
corporate control takes place much more on the basis of size rather than
performance (Singh, 1997).

The study on industrial production and prices of common stock, 1953-1975 has
revealed that the stock market and economic activity move in similar cyclical
patterns, this fundamental relationship shows that stock prices are meaningful
in the sense of reflecting real economic variables (Barry, 1975).

18
The indicators of stock market development reflect the development of an
economy. It is important to predict the course of the national economy because
economic activity affects corporative profits, investor attitudes and
expectations and ultimately security prices. The key for the analyst is that
overall economic activity manifests itself in the behavior of stock price or stock
market. This linkage between economic activity and the stock market is critical
(Fisher and Jordan, 1991).

Schwartz found in third joint study that government bonds, treasury bills and
real estate compensate somewhat for unexpected inflation. The surprising
result, however, is that common stock returns are negatively correlated with
both expected and unexpected inflation. Rather than being compensated for
inflation, investors on common stock have been penalized (Schwartz, 1975).

I) Indicators of Stock Market Development

The indicators of Stock market Development are size of market capitalization,
Liquidity indicators, Volatility and concentration which explained as follows:-

(a) Size
Market capitalization measures the size of stock market and equals the value of
listed domestic shares on domestic exchanges. Although large markets do not
necessarily function effectively and taxes may distort incentives to list on the
exchange, many observers use capitalization as an indicator of market
development.

(b) Liquidity Indicators

Turnover and value trade are two related measures of market liquidity.

First, turnover equals the value of the trades of domestic shares on domestic
exchange divided by the value of listed domestic shares. Turnover measures
the volume of domestic equities traded on domestic exchanges relative to the
size of market. High turnover is often used as an indicator of low transaction
costs. Importantly, a large stock market is not necessarily a liquid market: a
large but inactive market will have large capitalization but small turnover.

The second measures of market liquidity is value traded, which equals the
value of the trades of domestic shares on domestic exchange divided by GDP
while not a direct measure of trading costs or the uncertainty associated with
trading on a particular exchange, theoretical models of stock market liquidity
and economic growth directly motivate value traded. Value traded measures

19
trading volume as a share of national output and should therefore positively
reflect liquidity on an economy wide basis.

Value traded may be importantly different from turnover. While value traded
captures trading relative to the size of the economy, turnover measures trading
relative to the size of the stock market. Thus, a small and liquid market will
have high turnover, but small value traded.

(c) Volatility

This indicator is a 12 month, rolling standard deviation estimate based on

market returns. Greater volatility is not necessarily a sign of more or less stock
market development. Indeed, high volatility could be an indicator of
development, so far as revolution of information implies volatility in a well
functioning market.

(d) Concentration

In some countries a few companies dominate the market. High concentration is

not desirable because it may adversely affect the liquidity of the market. To
measures the degree of market concentration, share market capitalization
accounted for by ten largest stocks in computed and called concentration. In
more developed market the concentration is low whereas in less developed
market concentration may be quite large.

II) Indicator of Economic Growth

The indicators of economic growth are Real Per Capita GDP Growth, Physical
Capital Stock Growth, Gross Private Saving and Productive Growth which
explained as follows:-

(a) Real Per Capita GDP Growth

Economic growth can be most simply defined as the increase in the economy's
output overtime. The best measure of economy's output is reads GDP in
constant prices. The reason for specifying constant price is of course, the
changes over the year in GDP in current prices are the result of a mixture of
price changes and output changes. Therefore, if growth is defined as the
expansion of the economy's output and if we are to use GDP as a measure of
growth, then price changes must be removed from GDP as in the constant price
series. Furthermore; if the interest is not merely in how much the economy
aggregate output expands overtime but in how much the amount of output
produced per person expands overtime, real GDP must also be corrected for
population increases.
20
(b) Physical Capital Stock Growth
Real investment adds to nation's physical stock of capital and increase
employment. According to Keynes, "Investment means real investment; it
means an addition to nation's physical stock of capital. It creates employment
and generates income". As for example, the buildings of new factories new
companies are real investment. Capital is defined as buildings, equipments and
inventories and sometimes intangibles such as knowledge and technique, which
are both outputs of the productive process and inputs to future production.

(c) Gross Private Saving

As a matter of accounting, investment has to be financed by saving from either
domestic or foreign sources. In only a few high investment countries has
foreign savings accounted for more than 20% of investment over long stretcher
of time. In an economy investing, say 30% of its GDP, relying on foreign
saving beyond this limit would imply running a persistent current account
deficit in excess of 6% of GDP, which would be courting disaster. Hence the
critical importance of domestic saving in economic growth follows from a few
straight forward facts of economic life. Individuals as well as business
institutions define private saving as the surplus of income over consumption.
Private saving is of immense importance for economic growth because it helps
in increasing investment and capital stock growth.

(d) Productive Growth

When it comes to measure the source of growth and draw the economic policy
conclusions, economists rely on growth accounting. According to his approach,
per capita growth is explained by two sources; capital accumulation and total
factor productivity (Bebczuk, 2002).

The relation between output and inputs can be expressed as:

Total production = Efficiency × Volume of combined inputs

= TFP × Volume of combined inputs.

In other words:

Q = At F {Kt, Lt}

Where,

Q = Output (Value Added)

21
 K = Value of service rendered by capital

L = Value of service rendered by labor

A = Level of efficiency

t = Time

2.2 Review of Empirical Works

Several empirical studies have been conducted on the relationship between
stock market development and economic growth with varying results.

King and Levine (1993a, 1993b, and 1993c) study 80 countries over the
period 1960-1989 systematically, controlling for other factors affecting long
run growth, examine the capital accumulation and productivity growth
channels, construct additional measures of the level of financial development
and analyze whether the level of financial development predicts long-run
economic growth, capital accumulation and productivity growth. They use four
measures of the level of financial development. The first measure, depth,
measures the size of financial intermediaries and equals liquid liabilities of the
financial system (currency plus demand and interest bearing liabilities of banks
and non-bank financial intermediaries) divided by GDP. The second measure,
bank, measures the degree to which the central bank versus commercial banks
are allocating credit. Bank equals the ratio of bank credit divided by bank credit
plus central bank domestic assets. The third measure, private, equals the ratio
of credit allocated to private enterprises to total domestic credit (excluding
credit to banks). The fourth measure, privy equals credit to private enterprises
divided by GDP king and Levine (1993b, 1993c) then assess the strength of the
empirical relationship between each of these four indicators of the level of
financial development averaged over the 1960-1989 period "F", and three
growth indicators also averaged over 1960-1989 period, "G". In this way theses
four measures completely affects the accumulation, growth and present
condition of the stock market and economic growth.

The three growth indicators are as follows: (i) the average rate of real per
capital GDP growth, (ii) the average rate of growth in the capital stock per
person and (iii) total productivity growth which is a sale residual defined as
real per capital GDP growth minus (0.3) times the growth rate of capital per
person. In other words, if "F (i)" represents the value the "ith" growth indicators
and "x" represents a matrix of conditioning information to control for other
factors associated with economic growth (e.g. income per capital, education,
political stability, indicators of exchange rates, trade, fiscal and monetary

22
policy) then the following regression on cross section of 77 countries come
into existence.

The summary is presented in table 2.1:

Table 2.1: Growth and contemporaneous financial indicators (1960-1989)

Dependent Depth Bank Private Privy
variable

Real per 0.0024*** 0.032*** 0.034*** 0.032***

capital GDP
growth [0.007] [0.005] [0.002] [0.002]

R2 0.5 0.5 0.52 0.52

Real per 0.022*** 0.022** 0.02** 0.025***

capital stock
growth [0.001] [0.012] [0.011] [0.001]

R2 0.65 0.62 0.62 0.64

Productivity 0.018** 0.026** 0.027*** 0.025***

growth
[0.026] [0.010] [0.003] [0.006]

R2 0.42 0.43 0.45 0.44

* Significant at the 0.10 level

** Significant at 0.05 level

*** Significant at 0.01 level (P values in brackets)

There is a strong positive relationship between each of the four financial

development indicators, "F (i) and the three growth indicators "G (i)" long run
real per capital growth rates, capital accumulation and productivity growth. So,
the results suggest that the initial level of financial development is a good
predictor of subsequent rates of economic growth, physical capital
accumulation and economic efficiency improvements over the next 30 years
even after controlling for income, education, political stability and measures of
monetary, trade and fiscal policy.

Bencivega, et al (1996) studied about how is volume of activities in financial

markets is related to the level of efficiency of an economy's production
activities. They pursued the relation between an economy's efficiency in
performing financial transactions and its efficiency in performing physical
23
production. They have also discussed how an economy's volume of financial
transactions and its level. They have also analyzed why the connections
between the development of an economy's financial markets and its level of
real development, although close, are not perfect. Studying open these
propositions, they found that, as the efficiency of an economy's capital markets
increases [i.e. as transactions costs fall] the general effect is to cause agents to
make longer term, and hence more transactions intensive, investments. The
result is higher rate of return on saving as well as a change in its composition of
saving cause agents to hold more of their wealth in the form of existing equity
claims and to invest less in the initiation of new capital investments. As a
result, reduction in the resources losses suffered in the transactions process can
cause the capital stock either to rise or to fall. However, a general paint that
bears emphasis is that a reduction in transaction costs will typically alter the
composition of savings and investments, and that any analysis of the
consequences of such changes must take these effects into accounts.

Boyd and Smith (1996) developed a model in which capital is produced by

investors who make use of two technologies. One yield a high expected return
but has the advantage of full public observe-ability. Investors must make a
decision regarding how heavily they will use each technology. This decision
depends, among other things, on the relative price between capital and
resources used in state verification. As an economy develops investors will
perceive a relative cost of monitoring that rises over time. As a result, under the
condition typically expected to prevail, less use will be made of the un-
observable return, and more use will be made of the observable return
technology which is associated with equity. It is also typically expected the
ratio of equity finance to rise as an economy develops. Moreover, it is possible
to produce parameter values such that at low levels of development there will
be no use of equity markets. Equity markets actively can be observed for such
parameters only once the economy attains a critical level of real development.
It is also the case that the quantity of resources consumed by monitoring
declines as an economy develops. This provides a sense in which the
endogenous evolution of debt and equity markets in the development process
provides and economy with a more, efficient set of capital markets. Finally
their analysis provides a sense in which debt and equity markets function as
complements rather than substitutes. A case against the importance of equity
markets in financing real development is often made on the basis that existing
credit markets are close substitutes.

Levine and Zervos (1996) examine empirical association between stock

market development and long-run economic growth, using pooled cross-

24
country time-series regression of forty-one countries from 1976 to 1993. The
finding revealed a strong correlation between overall stock market
development and long-run economic growth, implying a positive relationship
between stock market development and economic growth.

Demirguc-Kunt, Asli & Vojislar, (1996) investigated the relationship

between stock market development and financing choices of firms, using data
from thirty developed and developing countries from 1980-1991. They
discovered that initial improvements in the functioning of a developing stock
market produce a higher debt-equity ratio for firms and thus more business for
banks, while for stock market that are already developed, further development
leads to a substitution of equity for debt financing.

Filer, Hanousek and Campos (1999) examines the relationship between stock
market development and economic growth using Granger causality tests for 70
countries for varying time periods beginning in 1985 and ending in 1997. They
find little relationship between stock market activity and future economic
growth, especially for the lower income countries.

Agarwal (2001) examines the relationship between stock market development

and economic growth using a time series cross-section data for nine African
countries from 1992-1997, using simple correlation between some stock market
variables and investment. The result suggests a positive relationship between
several indicators of the stock market performance and economic growth.

Beck and Levine (2001) investigates the impact of stock markets and banks on
economic growth, using a panel data set for the period 1976-98 and applying
recent GMM techniques developed for dynamic panels. On aggregate, they
found that stock markets and banks positively influence economic growth.

Gevit (2007) A casual inspection of stock market prices and GDP in developed
market economies reveals that these tend to move together over time. This
raises the question as to what is the reason for such a relationship. Explaining
such a relationship involves assessing the underlying direction of causality.
Does the stock market affect GDP, or is the causality in the opposite direction,
such that GDP triggers fluctuations in the stock market? This paper employs
the Granger causality test in order to examine causality direction. The focus of
the paper is on long-term trends and the evidence presented is garnered from
five of the top ten stock markets in the world in terms of market capitalization.

Shahbaz et al (2008) suggested that there is a long run relationship between

stock market development and economic growth for Pakistan. Stock market
development was found to be an important factor that enhances economic

25
growth. The authors also discovered a feedback relationship between stock
market development and economic growth in the long run. However, in the
short run, the causality runs only from stock market development to economic
growth.

Ezeoha et al (2009) investigated the nature of the relationship that exists

between stock market development and the level of investment (domestic
private investment and foreign private investment) flows in Nigeria. The
authors discovered that stock market development promotes domestic private
investment flows, thus suggesting the enhancement of the economy’s
production capacity as well as promotion of the growth of national output.

Seetanah (2009) examine the complex linkages between stock market

development, bank development and economic growth for the case of 27
developing countries studies over a period of 15 years (1991‐2007), employing
rigorous panel VAR procedures. The analysis demonstrated that stock market
development is an important ingredient of growth, but with a relative lower
magnitude as compared to the other determinants of growth, particularly with
banking development.

Nowbutsing and Odit (2009) examines the impact of stock market

development on growth in Mauritius utilizing a time series econometric
investigation over the period 1989 -20067. They analyzed both the short run
and long run relationship by constructing an Error Correction Model. They
found that stock market development positively affected economic growth in
Mauritius both in the short run and long run.

Adamopoulos (2010) examines the long-run relationship between stock market

development and economic growth for Germany for the period 1965-2007,
applying the Johansen co-integration analysis and a Vector Error Correction
Model based on the classical unit roots tests. The results of Granger causality
tests indicated that there is a unidirectional causality between stock market
development and economic growth with direction from stock market
development to economic growth.

Sililo (2010) investigated the directional link between stock market

development and economic growth in Zambia for the period 2002-2009, using
Toda and Yamamoto Causality Test and Granger causality test. The results of
the Toda and Yamamoto approach support the demand following hypothesis
that economic growth causes stock market development. The Granger
Causality test results lend support to the independent view that stock market
development and economic growth are independent of each other. The study

26
implies that the Zambian stock exchange could help promote further economic
growth in the country and should therefore be integrated in the whole economic
system.

Ake and Ognaligui (2010) investigate relationship between Douala stock

exchange and Cameroonian economic growth, using Granger-Causality tests
for 2006-2010. Their findings suggest that there is no relationship between
Douala stock exchange and economic growth for Cameroon. Their results do
not match with the other research findings confirming a positive relationship
between stock market development and economic growth.

Oskooe (2010) investigates the relationship between stock market performance

and economic growth in Iran by conducting causality tests. Findings imply the
causality link between economic growth and stock price fluctuations in the
long run and bilateral causality running between share prices and economic
growth in the short run. Therefore, it can be inferred that the level of real
economic activity is the main factor in the movement of stock prices in the long
run and stock market plays a role as a leading economic indicator of future
economic growth in Iran in the short run.

Vazakidis and Adamopoulos (2010) explore the causal relationship between

stock market development and economic growth of France for the period 1965-
2007, using a VECM. The estimated coefficient of error correction term found
statistically significant with a negative sign, which confirmed that the
economic growth caused stock market development in France. Therefore, the
inference of this study was that economic growth has a positive effect on stock
market development while interest rate has a negative effect on stock market
development.

Sahu & Dhiman (2011) made an attempt to explore the causal relationship
between stock market indicators and macro economic variables of India by
using both correlation and Ganger Causality regression techniques for the
period 1981 to 2006. The findings of this study reveal that there is no causal
relationship between stock market indicator i.e. SENSEX of Bombay stock
exchange and real gross domestic product of India despite they being highly
correlated. Therefore it is concluded that BSE SENSEX cannot yet be called as
an “indicator” of India’s growth and development.

Alajekwu, & Achugbu (2012) this study investigated the role of stock market
development on economic growth of Nigeria using a 15-year time series data
from 1994 - 2008. The method of analysis used is Ordinary Least Square
(OLS) techniques. The study measures the relationship between stock market

27
development indices and economic growth. The stock market capitalization
ratio was used as a proxy for market size while value traded ratio and turnover
ratio were used as proxy for market liquidity. The results show that market
capitalization and value traded ratios have a very weak negative correlation
with economic growth while turnover ratio has a very strong positive
correlation with economic growth. Also, stock market capitalization has a
strong positive correlation with stock turnover ratio. This result implies that
liquidity has propensity to spur economic growth in Nigeria and that market
capitalization influences market liquidity. We should view with caution the
notion that stock market size is not significant for economic growth since
multi-co linearity exists in the data used for this analysis.

Review of Major Nepalese Studies

In Nepalese context, following studies are of some importance while studying
about the relationship between stock market and economic growth.

Table 2:2 Reviews of Major Nepalese Studies

Year Name Findings

1981 Mahat It examines the state of capital markets and the development
of financial institutions in the country. The growth of the
financial institutions has been examined both in terms of the
growth in the number of financial institutions and in terms
of the growth in their assets. Their role in the national
economy has been evaluated in terms of some indicators
such as total financial institutions issue ratio and assets to
GDP ratio.

1982 Shrestha A study on the role of securities marketing centre in the

economic development of Nepal. The study was conducted
with the objectives to examine to role played by securities
marketing center in promoting Nepalese security. This study
covered the period of 4 years. He has concluded that the
securities marketing center is very poor in term of the
primary market and facing the problem of demand and
supply. Investors are influenced by the value of share and
dividend policy of the company while buying or selling the
securities.

2003 Paneru Studies about stock market and economic growth. He

focused the study on the importance of development stock

28
 market in overall economic growth. He found that the size
of primer as well secondary market has the positive,
influence on the overall size of the economic. He further
states that increasing issue of equity by firms indicates that
the investors are willing to take part in the investment
process and thus drive the economic force and strongly
performing stock market helps prevails the optimism in the
overall economy.

2004 KC. Stock market in Nepal is undeveloped and has failed to

show significant impact on the overall national economy of
the country. Small market size has made it vulnerable to
manipulation and price rigging. Low turnover ratio and
value-traded ratio to volatility, and high concentration ratio
indicate that stock market in Nepal is highly illiquid and
risky. Investors tend to avoid stock market because they
cannot invest in securities according to their risk-return
preference.

2004 Sindurkar Studies about the relationship between stock market and
economic growth, particularly at the role of stock market in
economic growth. He used only correlation analysis and
time series analysis in the study. He concludes that the
significant relationship does not exist between GDP and
NEPSE index. However, the relationship of GDP with
market capitalization and number of listed companies is
significant the correlation between economic growth rate
and turnover velocity is unexpected and insignificant.

2006 G.C. & It examine the existence of causality relationship between

Neupane stock market and economic growth in Nepal based on the
time series data for the year 1988 to 2005, employing
Granger causality test and using an equally weighted single
indicator of three stock market development indicators; the
average of ratios of market capitalization to GDP, annual
turnover to GDP and the annual turnover to market
capitalization. The study finds the long-run integration and
causality of macroeconomic variables and stock market
indicators even in a small capital market of Nepal, implying
that the stock market plays significant role in determining
economic growth and vice versa.

29
2010 Joshi The relation between stock market development and
economic growth in Nepal for period of mid July 1994 to
mid July 2008 by using Karl Pearson correlation. The study
finds that stock market development is not significantly
associated with economic growth during mid July 1994 to
mid July 2000 while there is a positive relation between
stock market development and economic growth during mid
July 2000 to mid July 2008.The findings indicate that stock
market has positive contribution to economic growth in
Nepal.

2010 Pradhan In this study assessed equity share price behavior in Nepal
& KC and tested the hypothesis that share price changes are
independent using weekly data of 26 listed companies from
mid-July 2005 to mid-July 2008. They found that random
walk hypothesis holds for less frequently traded stocks but
do not hold for highly traded stocks at NEPSE.

2012 Regmi The article examines causal relationship between stock

market development and economic growth in Nepal for the
period 1994-2011, using unit root test, co-integration, and
vector error correction models and developing NEPSE
composite index as an indicator of stock market
development. The finding suggests that stock market
development has significantly contributed to the economic
growth in Nepal. In this perspective, a refined policy
measures should be adopted to strengthen and improve the
role of stock market in order to expedite and maintain the
strong growth of the economy.

2012 Kharel & The study focuses on the long standing debate regarding the
Pokhrel relative merits of bank vs. capital market-based financial
system in promoting economic growth in the context of
Nepal. Using Johansen's co integrating vector error
correction model based on annual data from 1993/1994 to
2010/2011; we conclude that financial structure matters for
economic growth in Nepal. Particularly, our empirical result
suggests that Nepalese banking sector is more growth
enhancing relative to capital market.

2014 Rana The studies examined the long-run co-integrating

relationship between stock market development and

30
 economic growth in Nepal. Using 26 annual observations
on the time series of real GDP, market capitalization, annual
turnover from Mid-July 1988 to Mid-July 2013, the results
of co-integrated regression showed that both stock market
size and liquidity can predict the economic growth of Nepal
over the sample period. Employing Engle-Granger
procedures, the study also concluded that stock market size
and liquidity are co-integrated with economic growth of
Nepal and hence they are interrelated with each other in the
long run. Besides, the Johansen’s method of co-integration
test also confirmed the stable long-run equilibrium.

2014 Shrestha The study examines the determinants of the stock index
& Subedi (NEPSE) in Nepal using monthly data for the period of mid-
August 2000 to mid-July 2014. In order to incorporate the
major changes in politics and NRB’s policy on lending
against collateral of shares, two dummy variables have also
been used. The correlation analysis shows the existence of
the significant relationship between the NEPSE index and
macro variables chosen for the study such as Consumer
Price Index, Broad Money and Treasury Bill Rate. Time
series properties of selected variables have been examined.
Moreover, empirical results obtained from OLS estimations
of behavioral equations reveal that the NEPSE index is
found to respond positively to inflation and broad money
growth, and negatively to treasury bills rate. This suggests
that, in Nepal, share investors seem to take equities as a
hedge against inflation and consider stock as an alternative
financial instrument. More importantly, stock market has
been found to respond significantly to changes in political
environment and the policy of NRB.

From the above mentioned Review of Nepalese Studies works makes it clear
that the development of the stock market is a necessary factor for modern day
economy. Therefore, it is obvious that stock markets be well-functioning for
the sustainable economic development. Firms need capital to grow and finance
their investment needs. It requires more efficient way of raising funds. If the
investment is required for new technology for the projects with long-gestation
period, premature liquidation of the capital is always on cards without the

31
existence of liquid and well-functioning stock markets. Thus, it assumes a
significant role in present day economics. Because of its primary stage of
growth and stabilization, the contribution of Nepalese stock market to the
economy is yet to be recognized. Though, there has been a lot of studies
explaining on the relationship between stock market and economic growth in
other contexts, such a study is still due to come in our context. This study aims
to fill the gap by assessing the contribution of NEPSE and primary stock
market to the overall economic growth of the economy.

2.3 Research Gap

Despite some valuable studies on stock market and economic growth of Nepal,
there remains a large scope for research on various areas related to the
Nepalese stock market and economic growth in Nepal. Especially regarding
what the movements in the stock market with economic variables, very few
studies have been done in the past.

There is a gap of time period which is fulfilled by this study. The present
economic scenario is also change. The using tools of this study are also
different from other previous studies.

The study incorporates the relationship between stock market and economic
growth in Nepal. Also Nepal's stock market has been undergoing significant
changes in the last few years with the introduction of new rules and bylaws,
improvement in the infrastructure of trading and entry of mutual funds and
market makers. This research will attempt to fill the research gap by exploring
the relationship of the NEPSE index with economic variables using the updated
stock market data of Nepal.

32
 CHAPTER – III

RESEARCH METHODOLOGY
The research methodology is the general research strategy that outlines the way
in which research is to be undertaken and, among other things, identifies the
methods to be used in it. These methods, described in the methodology, define
the means or modes of data collection or, sometimes, how a specific result is to
be calculated.

Research Methodology refers to the various sequential steps to adopt by a

researcher in studying a problem with certain objectives in view. It tries to
make clear view of method and process adopted in the entire aspect of the
study. It is known as a path from which we can systematically solve the
research problem. This research tries to perform a well-designed quantitative
and qualitative research in a very clear and direct way using both financial and
statistical tools. Detail research methods are described in the following
headings.

3.1 Research Design

Research design refers to the entire process of planning and carrying out a
research study. To carry out the study descriptive, co-relational and analytical
research design has been employed. For the purpose of description and
conceptualization descriptive and analytical research design is used. However,
for the purpose of analyzing the relationship between the variables of stock
market development and economic growth, co-relational research design is
used. It is also chosen to investigate the causality between stock market
indicators and growth indicators. The study covers the 8 year time period
between the fiscal year 2007/2008 to 2014/2015 for the purpose of testing
causality between various stock market indicators and growth variables.

3.2 Nature and Source of Data

The study is based on the secondary data only. As the study is related to the
aggregate values of the economy as well as the aggregate values of stock
market activities no need for primary data has been felt. The required data are
collected on the variables such as GDP, gross domestic saving investment,
gross capital formation, market capitalization, turnover, value traded and
primary issue approval and NEPSE index. The data on the variables such as
stock market volatility has been derived by using appropriate relationship.

33
The supplementary data and information have been acquired from various
sources like;

• Trading reports of NEPSE.

• Annual reports of SEBO/N.
• Economic survey, Fiscal Year 2014/15 (Government of Nepal, Ministry
of Finance 2015)
• Nepal Rastra Bank's Economic Report.
• Previous research studies and dissertations.
• Articles and journals available in different library.
• Central bureaus of statistics.
• Different Websites.

3.3 Selection of Study Period

The transaction of the stock in the Nepalese stock market started form the fiscal
year 1993/94. As this study is about the contribution made by the stock market
in the economy, time period of the study will be 2007/2008 to 20014/20015.
This is related to the main part of the study. Since the study has been totally
confined to the relationship between stock market and economic growth,
population and samples are same.

3.4 Method of Analysis

Analysis is the systematic and careful examination of available facts so that
certain conclusions can be drawn and an inference is made. The major part of
this study is concerned with testing the relationship of stock market with
economic growth. Various related tools and techniques have been used for this
purpose. Trend analysis, correlation analysis regression analysis, econometric
models, and other statistical tools have been used for the analysis. The
empirical results have been estimated in the study by using annual data for the
year 2007/2008 to 2014/2015 period.

3.4.1 Trend Analysis

A trend analysis is an aspect of technical analysis that tries to predict the future
movement of stock market and economic growth. Trend analysis is based on
the idea that what has happened in the past gives traders an idea of what will
happen in the future. In this study trend analysis is used for following
objectives:-

• To find the relationship between primary market activities and secondary

market development, the amount of equity issuance approved in the primary

34
 market is compared with market capitalization, turnover and value traded. It
is done to find some kind of relationship between primary markets and
secondary markets.
• To exhibit the trends of different indicators of economic growth GDP,
saving, investment and capital formation and change in stock during study
period are presented.
• To determine the relationship between development of stock market and
economic growth, the trends of primary market's amount of equity issuance
and NEPSE index are compared with the factors of growth such as GDP,
saving, investment, capital formation.

3.4.2 Arithmetic Mean

The arithmetic mean (or mean or average) is the most commonly used and
readily understood measure of central tendency. In statistics, the term average
refers to any of the measures of central tendency. The arithmetic mean is
defined as being equal to the sum of the numerical values of each and every
observation divided by the total number of observations. In this study, it is used
to calculate the average of various indicators of stock market and economic
growth like; market capitalization, value traded, turnover, volatility, size of
primary market, GDP, saving, investment, and capital formation through the
study period 2007/2008 to 2014/2015.

The arithmetic mean is defined by the following formula:-

∑ଡ଼
Mean (x
ത) =
୬

Where,
ഥ = Arithmetic Mean
X

∑X = Sum of Values of all items, and

N = Number of items

3.4.3 Standard Deviation

In statistics, the standard deviation is a measure that is used to quantify the
amount of variation or dispersion of a set of data values. A standard deviation
close to 0 indicates that the data points tend to be very close to the mean (also
called the expected value) of the set, while a high standard deviation indicates
that the data points are spread out over a wider range of values. The researcher

35
also calculates the standard deviation of various variables used in the study
period 2007/2008 to 2014/2015.

The Standard Deviation is defined by the following formula:-

∑ሺ୶ି୶ത)మ
Standard Deviation (S.D.) = ට
୬

Where,

S.D. = Standard Deviation

∑ሺx − xത)ଶ = Sum of Squares of the deviation measured form arithmetic

average.

N = Number of items

3.4.4 Coefficient of Variation

The coefficient of variation (CV) is defined as the ratio of the standard
deviation to the mean. These are the measurements that can only take non-
negative values. It is expressed in percentage.

The Coefficient of Variation is defined by the following formula:-

ୗ.ୈ.
Coefficient of Variation (CV) = × 100
୶ത

Where,

S.D. = Standard Deviation

xത = Mean
The higher CV denotes to the higher fluctuation of variables and vice-versa.

3.4.5 Correlation Analysis

The appropriate statistical tool to measure the relationship between two or
more variables in quantitative terms is the correlation analysis. Correlation
shows the degree of relationship between the variables. It is the square root of
the coefficient of multiple determination. Correlation can either be positive or it
can be negative. If the values of the variables are directly proportional then the
correlation is said to be positive. On the other hand, if the values of the
variables are inversely proportional, the correlation is said to be negative, but
the correlation coefficient always remains within the limit of +1 to -1.

36
The Coefficient of correlation is defined by the following formula:-
∑௫௬
Coefficient of correlation (rXY) =
ඥ୶మ ×ඥ୷మ

Where,

x=X- x
ത
y=Y- Y
In this study, coefficient of correlation is calculated between various indicators
of stock market, such as market capitalization, value traded, turnover,
volatility, and size of primary market and various indicators of economic
growth, such as, gross domestic product, saving, investment and capital
formation.

3.4.5.1 Coefficient of Multiple Determination (R2)

A coefficient of determination is a measure used in statistical model analysis to
assess how well a model explains and predicts future outcomes. It is indicative
of the level of explained variability in the model. The coefficient, also
commonly known as R-square, is used as a guideline to measure the accuracy
of the model. In other words, R2 measure the percentage total variation in
dependent variable explained by independent variable the coefficient of
determination can have value ranging from zero to one. A value of one can
occur only if the unexplained variation is zero, which simply means that al the
data points in the scatter diagram fall exactly on the regression line. In this
study, R2 is calculated as the requirement of model.

The Coefficient of Multiple Determination is defined by the following

formula:-
୉୶୮୪ୟ୧୬ୣୢ ୚ୟ୰୧ୟ୲୧୭୬
Coefficient of Multiple Determination (R2) =
୘୭୲ୟ୪ ୚ୟ୰୧ୟ୲୧୭୬

3.4.6 Regression Analysis

In statistical modeling, regression analysis is a statistical process for estimating
the relationships among variables. It includes many techniques for modeling
and analyzing several variables, when the focus is on the relationship between
a dependent variable and one or more independent variables (or 'predictors').
More specifically, regression analysis helps one understand how the typical
value of the dependent variable (or 'criterion variable') changes when any one
of the independent variables is varied, while the other independent variables are

37
held fixed. Most commonly, regression analysis estimates the conditional
expectation of the dependent variable given the independent variables – that is,
the average value of the dependent variable when the independent variables are
fixed. Less commonly, the focus is on a quintile, or other location parameter of
the conditional distribution of the dependent variable given the independent
variables. In all cases, the estimation target is a function of the independent
variables called the regression function. In regression analysis, it is also of
interest to characterize the variation of the dependent variable around the
regression function which can be described by a probability distribution.

In this study, basically indicators of economic growth are dependent variables

and indicators of stock market development are independent variables.

The main objective of this study is to found the relationship between stock
market and economy growth. The variables that will be used in the models are
Gross Domestic Product (GDP), savings (S), Investment (I), Capital Formation
(CF), Market Capitalization (MC), Value of Traded Shares (VT), Turnover
(TO), Size of Primary Market (PM) and Volatility of Stock Returns (V).

Theoretical statement of the model is that of GDP may be regarded as subject

to the constraints of various stock market related variables. As an
approximation of the theory, the function may be written as;

GDP = F {MC, VT, TO, V, PM}…………………….. (3.1)

Where,

GDP = Real gross Domestic Product at basic price (Base year:

2007/2008 = 100)

MC = Market Capitalization

VT = Value of Traded Shares

TO = Turnover of Shares

V = Volatility of Stock Returns

PM = Size of Primary Market

The estimated equation has been specified as follows;

GDP = a + b1MC + b2VT + b3TO + b4V + b5PM……………… (3.2)

38
Similarly, theoretical statement of the model is that of savings (S) may be
regarded as subject to the constraints of various stock market related variables.
As an approximation of the theory, the function may be written as;

S = F {MC, VT, TO, V, PM} …………………………….. (3.3)

Where,

S = Savings

The estimated equation has been specified as follows;

S = a + b1MC + b2VT + b3TO + b4V + b5PM……………… (3.4)

Similarly, theoretical statement of the model is that of Investments (I) may be

regarded as subject to the constraints of various stock market related variables.
As an approximation of the theory, the function may be written as;

I = F {MC, VT, TO, V, PM} …………………………….. (3.5)

Where,

I = Investments

The estimated equation has been specified as follows;

I = a + b1MC + b2VT + b3TO + b4V + b5PM……………… (3.6)

Finally, theoretical statement of the model is that of capital formation (CF) may
be regarded as subject to the constraints of various stock market related
variables. As an approximation of the theory, the function may be written as;

CF = F {MC, VT, TO, V, PM} …………………………….. (3.7)

Where,

CF = Capital Formation

The estimated equation has been specified as follows;

CF = a + b1MC + b2VT + b3TO + b4V + b5PM……………… (3.8)

Equations (3.1) to (3.8) are concerned with the major part of this study. These
equations are used to assess the nature of relationship between various stock
market indicators and economic growth indicators.

39
3.4.6.1 Regression Constant (a)
The value of constant, which is the intercept of the model, indicates the average
level of dependent variable when independent variable is zero. In another
words, it is better to understand that 'a' constant indicates the mean or average
effect on dependent variable of all the variables omitted from the model. In this
study, regression constant is calculated for selected dependent and independent
variables specified in the model, which is presented above.

3.4.6.2 Regression Coefficients (b1, b2, b3,…………bn)

The regression coefficient of each independent variable indicates the marginal

relationship between that variable and value of dependent variable, holding
constant the effect of all other independent variables in the regression model. In
other words the coefficients describe how changes in independent variables
affect the values of dependent variables estimate. It is also known that the
numerical constant which determines the change in dependent variable per unit
change in independent variables (i.e., slope of the line).

3.4.6.3 Standard Error of Estimate (SEE)

With the help of regression equations perfect prediction is practically
impossible. Standard error of an estimate is a measure of the reliability of the
estimating equation, indicating the variability of the observed points around of
regression line, i.e., the extent to which observed values differ from their
predicted values on the regression line. The smaller the value of SEE, the
closer will be the dots to the regression line and better the estimates based on
the equation for this line if SEE is zero, then there is no variation about the line
and the correlation will be perfect. Thus, with the help of SEE, it is possible to
ascertain how good and representative the regression line is as a description of
the average relationship between two series.

3.5 Limitation of the Study

Applying the econometric method for analysis of Nepalese economic aggregate
is not likely to produce the reliable results due to wide range of data
deficiencies. Data on important aggregate variables are available only on yearly
basis. Admittedly, all economists including those in the planning commission
complain this problem, but unfortunately it remains as acute as in the past and
rather more acute than most other developing countries. The availability of data
is far from ideal. Since all the important data are available on yearly basis, the
extensive study is not possible. In the context of poor database, a rigorous

40
quantitative analysis of the macroeconomic relationship for Nepalese economy
may not be feasible and justified.

This study is based on the data for the period of eight years from 2007/2008 to
2014/2015. It tries to find out the relationship between stock market and
economic growth. For this purpose the period of eight years is not adequate to
form any kind of relationship but an attempt has been made in that direction.
The following are the main limitations of this study.

• The study is based on the period of only eight years i.e. since 2007/2008
to 2014/2015, so the study period may have been regarded as shorter
and inference should have to be made with caution.
• For Year 2014/15 data are based on the first 8 months of the current
fiscal year.
• Capital formation and Investment for year 2014/15 are the average of
past 7 year data, due to unavailable of actual information.
• The study is based on yearly data only, hence making it a study of eight
observations only. Had the database been efficient enough and monthly
or quarterly data on stock market and growth been available, the result
might have been for better and reliable than what is expected from this
analysis.
• The study is based on secondary sources of data, authenticity of which
may be questioned, as there are variations in the some data variable
across the sources.
• The data on some variables are not readily available, and hence are
estimated by standard form of relationship.
• The stock market in Nepal is in its early stage of growth and
stabilization. The investors are gradually becoming aware of the stock
market activities and the authorities are realizing that the development
of a strong stock market is highly needed. But, it may be a little too fast
to measure the concrete contribution made by stock market to the
economy and attempt to from a certain pattern of relationship. There
may form no sensible relation at all or the significance of the
relationship may have to be questioned.
• The assumption that the strong and efficient stock market help to
mobilize saving and efficient allocate May not be true in our case since
the Nepalese stock market is not strongly efficient. Therefore, the study
in this direction may lead nowhere at the stage, but it is worth
attempting.

41
To overcome some of these limitations and support the hypothesis that the
stock market help to channelize the saving hence increase the investment
and expand the corporate base, the main apart of the study is supported by
different tools and techniques used.

42
 CHAPTER – IV

PRESENTATION AND ANALYSIS OF DATA

This chapter is the backbone of the research. In this chapter, the collected data
are presented in systematic manner and analyzed by using different appropriate
tools and techniques. This chapter is divided into four sections.

• The first section is related with trend analysis of various indicators of

stock market and economic development.
• In the second section of this chapter mean, standard deviation and
coefficient of variation are computed to measure the average and
variation among various indicators of stock market and economic
growth.
• The third section of this chapter attempts to find out the association
between the indicators of economic growth and stock market
development with the help of correlation matrix.
• And the fourth or last section of this chapter examines the casual
relationship between economic growth and stock market development
indicators by using regression analysis and testing of hypothesis.

4.1 General Trend Analysis

One of the most important aspects of the secondary stock market activities is
that the movements in the secondary markets not only influence the firm's other
activities but also their position in the primary equity market. A firm in need of
capital, unable to find it through other means, ultimately turns towards the
equity investors in the primary market. But the proposition is that only those
firms that are performing strongly in the secondary market could be able to
raise the equity investments through the primary market. Their shares price and
its movements are used as signal by the investors for evaluating its future
prospects. Therefore, to examine the direction of the movements of secondary
market indicators as well as size of the primary market, simple line trend
analysis is performed. Later in the section, the size of the primary market and
secondary market is compared with the various indicators of economic growth
for the purpose of uniformity in the comparison all the variables i.e. GDP,
Saving (S), Investment (I), Capital Formation (CF), Market Capitalization
(MC), Value Traded (VT), Turnover (TO), Volatility (V), Size of Primary
Market (PM), and NEPSE index are transformed into logarithms values.

43
Figure 4.1: Presentation of log values of the primary issue amount (PM) and
NEPSE INDEX over the study period.

3.5
3
2.5
Log Values

2
1.5
1
0.5
0
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
NEPSE Index 2.983788 2.874539 2.679182 2.559727 2.590775 2.714606 3.015405 2.982827
P.M. 0.998295 1.225847 1.034236 0.835715 0.469823 1.028592 0.860953 0.948916
Fiscal Year

NEPSE Index P.M.

Source: - Appendix IV

The aforementioned figure 4.1 shows that the horizontal line is the converted
log values of NEPSE Index and Size of primary market and the vertical line is
the study period (Fiscal Year) 2007/08 to 2014/15. The comparison between
Size of Primary market and NEPSE Index opens the mark for indicating the
development pace of a country. They are the indication of whole country’s
economic to average growth. The size of primary market and NEPSE Index
both are in fluctuate position. NEPSE index is high in year 2013/14 and the
Size of Primary market in year 2008/09. Though in the year 2011/12 there was
less equity issues in the market in comparison with other year and the lower
Index in year 2010/11. Primary and secondary market presents normal sign
during study period though the stock market in Nepal is developing slowly.

44
Figure: 4.2: Presentation of log values of market Capitalization (MC), Value
traded (VT) and size of the primary Market (PM) for the study period.

2.5

2
Log Values

1.5

0.5

0
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15
MC 2.563774 2.710065 2.576193 2.509853 2.566157 2.711378 3.024143 2.995371
VT 1.358330 1.336081 1.073758 0.823819 1.011688 1.343385 1.888171 1.815126
PM 0.998295 1.225847 1.034236 0.835715 0.469823 1.028592 0.860953 0.948916

Source: - Appendix IV

This figure 4.2 displays that the size of primary market (PM) is compared with
market capitalization (MC) and Value Traded (VT) which present even more
encouraging signs. In the fiscal year 20011/12 MC and PM were decreased
slowly but in the same period VT is increased rapidly. Moreover after the fiscal
year 2012/13 all three variables were increased in increasing trend but the fiscal
year 2014/15 seen as exception where value trades is decreased even though
market capitalization and size of primary market were increased in similar
trend. Since it is assumed that the time increases, with it the activities in the
stock market also increase. More firms are listed in the market; move investors
participate in investing activities, more information become available in the
market and so on. These activities have positive impact on MC, VT, and PM
and from Figure 4.2 we can see it to be true.

45
Figure 4.3: Comparison of the log value of size of the primary market (PM)
and NEPSE Index with the log values of Gross Domestic Product (GDP),
Savings (S) Investment (I) and Capital Formation (CF) for the study period.

3.5

2.5

2
Log Values

1.5

0.5

0
2007/0 2008/0 2009/1 2010/1 2011/1 2012/1 2013/1 2014/1
8 9 0 1 2 3 4 5
GDP 2.71792 2.73456 2.75266 2.76900 2.78859 2.80468 2.82607 2.83903
CF 2.19936 2.23561 2.33586 2.34879 2.32641 2.37639 2.43353 2.32853
S 1.70914 1.70768 1.80956 1.91513 1.82998 1.82999 1.86350 1.89594
I 2.05836 2.06293 2.09901 2.09942 2.10665 2.15879 2.20265 2.11525
PM 0.99829 1.22584 1.03423 0.83571 0.46982 1.02859 0.86095 0.94891
NEPSE
2.98378 2.87454 2.67918 2.55972 2.59077 2.71460 3.01540 2.98282
Index

Source: - Appendix IV

While comparing PM and GDP it can be said that PM also influences GDP
through saving, investment and Capital formation. In case of secondary market
of NEPSE index, since it was slightly decreased in the beginning of the study
period, but after the fiscal year 2011/12 it staring increasing for two years.
Hence there is positive relationship between the stock market and the national
economy.

46
 4.2 Summary Statistics
Presentation of Minimum value, Maximum Value, mean, Standard Deviation
and Coefficient of Variation of the indicators of stock market development and
economic growth.

Table 4.1

Summary Statistics: Annual Averages 2007/08-2014/15

Minimum Maximum Mean Standard Coefficien Obse

Deviation t of rva-
Variation tion

Gross Domestic 522.3 690.3 603.875 56.14984 9.29825 8

Product

Savings 51.013 78.6942 66.9859 10.71398 15.9943 8

Investment 114.3837 159.46 130.393 13.96624 10.71088 8

Capital Formation 158.2569 271.8994 213.0758 35.4949 16.65835 8

Market Capitalization 323.4843 1057.1658 644.12315 305.0482 47.35868 8

Value Traded 6.6653 77.2958 33.99577 26.92972 79.2149 8

Turnover 2.06047 7.31186 5.2361464 2.054084 39.22893 8

45

Volatility 33.88 148.61 90.875714 49.95782 54.97378 8

29

Size of Primary 6.8504 16.82085 10.604775 4.241331 39.99454 8

Market

NEPSE Index 362.85 1036.11 779.77857 297.3266 38.12963 8

1

Source: - Appendix II and III

Table 4.1 presents the clear picture of summary statistics on the four economic
growth indicators and six stock market development indicators. We have the

47
data for eight years period from 2007/08 to 2014/15 of Nepal. Arithmetic mean
is average of random variable which can be used for further analysis. The
arithmetic mean of Gross Domestic Product, Saving, Investment, Capital
Formation, Market Capitalization, Value Traded, Turnover, Volatility, Size of
Primary Market and NEPSE Index are 603.875, 66.9859, 130.393, 213.0758,
644.12315, 33.99577, 5.236146445, 90.87571429, 10.604775 and 779.7785714
respectively. All the data are presented in rupees in billion except turnover is
the percentage of value traded to market capitalization, volatility is the standard
deviation of monthly NEPSE index and NEPSE index in points.

Standard deviation measures the variability of the observations around the

mean value. The standard deviation of Gross Domestic Product, Saving,
Investment, Capital Formation, Market Capitalization, Value Traded, Turnover,
Volatility, Size of Primary Market and NEPSE Index are 56.14984, 10.71398,
13.96624, 35.4949, 305.0482, 26.92972, 2.054084, 49.95782, 4.241331 and
297.3266 respectively, which is also used for further analysis.

The coefficient of variation (CV) is the relative measure of dispersion. The CV

of Gross Domestic Product, Saving, Investment, Capital Formation, Market
Capitalization, Value Traded, Turnover, Volatility, Size of Primary Market and
NEPSE Index are 9.29825, 15.9943, 10.71088, 16.65835, 47.35868, 79.2149,
39.22893, 54.97378, 39.99454 and 38.12963 respectively.

Hence the table 4.1 shows substantial variance among the growth and stock
market development indicators. The value traded has the highest CV of
79.2149%, which represents there is high fluctuation of the value traded among
the study period. In another words, there is 79.2149% variation of the amount
of value traded among study period. Similarly the GDP has the lowest CV of
9.29825%, which represents there is less fluctuation of amount of GDP among
study period. In another words there is 6.9994% variation in amount of GDP
among study period.

4.3 Correlation Analysis

Correlation coefficients between each of the variables are computed to
determine any kind of association. The variables are Gross Domestic Product,
Saving, Investment, Capital Formation, Market Capitalization, Value Traded,
Turnover, Volatility, Size of Primary Market and NEPSE Index for the period
of eight years from 2007/08 to 2014/15. The correlation results are presented in
the matrix form in table 4.2.

48
 Table 4.2:- Correlation Matrix

GDP S I CF MC VT TO V PM NI

GDP 1

S 0.737 1

I 0.770 0.511 1

CF 0.761 0.715 0.932 1

MC 0.78 0.364 0.656 0.516 1

VT 0.705 0.290 0.630 0.456 0.983 1

TO 0.380 -0.106 0.383 0.097 0.793 0.875 1

VT -0.282 -0.555 0.099 -0.093 0.301 0.361 0.476 1

PM -0.430 -0.598 -0.339 -0.445 -0.026 -0.046 0.129 0.556 1

NI 0.212 -0.212 0.197 -0.076 0.726 0.816 0.967 0.587 0.250 1

Source: - Appendix II and III

Where,
GDP = Gross Domestic Product
S = Saving
I = Investment
CF = Capital Formation
MC = Market Capitalization
VT = Value Traded
TO = Turnover Volatility,
PM = Size of Primary Market and
NI = NEPSE Index at the end of the year.
Table 4.2 presents the correlations. The following correlations are worth
highlighting. Obviously, there is the strong correlation between GDP with
saving, investment and capital formation with the coefficient 0.737, 0.77 and
0.761 respectively. The interesting correlation prevails between the stock
market indicator Market Capitalization (MC) and growth indicators i.e. Gross
Domestic Product (GDP), Saving (S), Investment (I) and Capital Formation

49
(CF). The correlation coefficient between MC and GDP is 0.78, between MC
and S is 0.364, between MC and I is 0.656 and between MC and CF is 0.516.

The correlation of MC with growth variables is meaningful and telling. In the

context of this significant relationship, few inferences can be made. First, as the
MC is the product of market prices of shares multiplied by the outstanding
number of shares and if the firms are performing strongly in a bull market, it
passes an optimistic message to the general investors who tend to invest more
in the market and firms. On the other hand, without having any productive and
profitable investment project in hand no firm can be able to influence its share
prices in the market. So to finance such projects firm need to capitalize their
earnings which will increase their saving. The inference is that, as the shares
are performing strongly in the market general investors as well as firms tend to
save their earning for further investment purposes, which ultimately increases
the gross domestic saving. Therefore a strong correlation between market
capitalization and saving is quite natural. Same proposition applies in case of
the relation between MC and I as well as MC and CF also. Since the investors
(individual or institutional) tend to save, they invest their saving in the new
projects and hence increasing their saving in the new projects and also
increasing their investment which fuel up the national capital formation. The
result of all this is that market capitalization is also significantly and positively
strongly correlated with gross domestic product.

Some other indicators of stock market are also related to the economic growth
indicators. The Value Traded (VT), which is equal to the amount of turnover in
domestic stock market, has significant correlations with Gross Domestic
Product (GDP), Saving (S), Investment (I), and Capital Formation (CF). The
correlation coefficients between VT and GDP is 0.705, between VT and S is
0.29, between VT and I is 0.63 and between VT and CF is 0.456.

Higher the Value Traded is regarded as the good indicator of stock market that
contributes positively towards the economy. Thus significant relationship of
Value Traded to GDP, Saving, Investment and Capital Formation is
meaningful. Higher the value traded means that the stock market performing
better with the maximum participation of the investors. If more investors are
involved in the market savings, investment and capital formations are likely to
increase and hence the GDP. Therefore, the positive significant correlations are
all and expected.

Another indicator of stock market development is Turnover (TO) which equals

to the trading value of the stocks in domestic share market divided by market
capitalization. It measures trading relative to the size of the market. A high

50
turnover is the indicator of the more liquid market. The TO positive correlation
with Gross Domestic Product (GDP), Investment (I), and Capital Formation
(CF) and negative correlation with Saving (S). The Correlation coefficients
between TO and GDP is 0.38, between TO and S is -0.106, between TO and I
is 0.383 and between TO and CF is 0.097. Though the correlations of stock
market liquidity indicator TO with economic growth indicators, such as GDP, I
and CF are positive but the correlations are insignificant and unexpected. This
unexpected and insignificant correlation may be due to the other unobserved
factors as described in limitation.

The relationship between the size of the Primary Market (PM), and economic
growth indicators is negative significant. For instance, the coefficients of
correlation between PM and GDP is -.043, between PM and S is -0.598,
between PM and I is -0.339 and between PM and CF is -.0445. On the basis of
these relationships, few interesting implications can be observed. Strongly
performing secondary market is also a cause of growing activities in the
primary market. With their prices appreciating in the secondary market, firms
feel at case to go for the equity issue in the primary market if and when the
situation arises, the investors in the primary markets also look for the
productive and profitable investment and invest in the firm's shares that are
performing well in the secondary markets. This interrelation between primary
and secondary market also explains the efficiency of the market. And the
market efficiency is closely related to the efficiency of the economy except
ignoring some of the coefficient values.

4.4 Regression Analysis

For the purpose of investigating the causality between stock market indicators
and economic growth indicators four regression have been run. Variables that
enter into the regression are Gross Domestic Product (GDP), Saving (S),
Investment (I), Capital Formation (CF), Market Capitalization (MC), Value
Traded (VT), Turnover (TO), Volatility (V), Size of Primary Market (PM) and
NEPSE Index (NI).

4.4.1 Multiple Regression between Gross Domestic Product (GDP)

with Stock Market Variables
The relationship of growth indicator Gross Domestic Product (GDP) with the
stock market variables; Market; Capitalization (MC), Value Traded (VT),
Turnover (TO), Volatility (V), Size of Primary Market (PM) and NEPSE Index
(NI) are investigated in table 4.3.

51
Table 4.3: Regression of Gross Domestic Product (GDP) on Market
Capitalization (MC), Value Traded (VT), Turnover (TO), Volatility (V), Size
of Primary Market (PM) and NEPSE Index (NI).

Regression Equation:

GDP = a + b1MC + b2VT + b3TO + b4V + b5PM + b6NI ………….. 4.1

Table 4.3

MC VT TO V PM NI R2

Estimated 0.367 -2.065 25.892 -0.277 -2.467 -0.210 0.996

Coefficient

Standard 0.2131 3.0534 12.1480 0.1470 2.3927 0.0767

Error

Source: Appendix V

Where,

(i) Dependent Variable :- Gross Domestic Product (GDP)

(ii) Independent Variable: - Market Capitalization (MC), Value
Traded (VT), Turnover (TO), Volatility (V), Size of Primary
Market (PM) and NEPSE Index (NI).
(iii) R2 = Adjusted Coefficient of Multiple Determination

Table 4.3 presents the results of regression where dependent variable is gross
domestic product and stock market indicators are the independent variables.
The results presented in table 4.3 indicate that the estimated coefficients of
Market Capitalization and Turnover have positive and expected signs but the
coefficients of Value Traded, Volatility, Size of Primary Market and NEPSE
Index have negative signs. The regression coefficient of market capitalization
is 0.367, which indicates 10% change in market capitalization will lead 3.67%
change in gross domestic product. But the regression coefficient of Value
Traded, Volatility, Size of Primary Market and NEPSE Index are -2.065, -
0.277, -2.467 and -0.210 respectively which indicates there are inverse relation
between value traded, volatility, size of primary market and NEPSE Index with
gross domestic product. The regression coefficient of turnover is 25.892 which
is positive and high. It is due to the comparison of data between amount in
rupees and percentage.

52
The value of R2 is 0.996 meaning that about 100% of the variability in gross
domestic product is explained by market capitalization, value traded, turnover,
volatility, size of primary market and NEPSE Index.

These all the results, however, should be viewed very skeptically because all
the results are based on only eight years observations (from 2007/08 to
2014/15). But the reasons for the positive relations of market capitalization and
turnover are clear. The relation of gross domestic product with market
capitalization is that as market capitalization is the market value of all listed
outstanding share and the price element is associated with it. Pricing of
securities is done with a lot of aspects keeping in view. Some factors are the
profitability of the firm, its investment plans and its saving position. If prices of
stocks are increasing its shows that the listed firms on an average have got
good investment projects in their hands and are expected to be turned profitable
in the future.

The relation with liquidity indicator turnover is also positive and

understandable. The more amounts of shares traded the better because, the
more transaction of share is the indication that the more investors are joining
the market and resource are mobilized. Resource mobilization is a factor to
growth.

Other remaining stock market indicators variable seems negative regression

coefficient, which indicates inverse relation with gross domestic product.

4.4.2 Multiple Regression between Saving(S) with Stock Market

Variables
It would be interesting to turn towards the relationship between saving, another
factor of economic growth and the factors of stock market development. The
relationship of growth indicator Saving (S) with the stock market variables;
Market Capitalization (MC), Value Traded (VT), Turnover (TO), Volatility
(V), Size of Primary Market (PM) and NEPSE Index (NI) are investigated in
table 4.4.

Table 4.4: Regression of Saving (S) on Market Capitalization (MC), Value

Traded (VT), Turnover (TO), Volatility (V), Size of Primary Market (PM) and
NEPSE Index (NI).

Regression Equation:

S = a + b1MC + b2VT + b3TO + b4V + b5PM + b6NI ………….. 4.2

53
 Table 4.4

MC VT TO V PM NI R2

Estimated -0.203 3.525 -13.727 -0.198 1.541 -0.021 0.980

Coefficient

Standard 0.09 1.283 5.104 0.062 1.005 0.032

Error

Source: Appendix VI

Where,

(i) Dependent Variable :- Saving (S)

(ii) Independent Variable: - Market Capitalization (MC), Value
Traded (VT), Turnover (TO), Volatility (V), Size of Primary
Market (PM) and NEPSE Index (NI).
(iii) R2 = Adjusted Coefficient of Multiple Determination

Table 4.4 presents the results of regression where dependent variable is saving
and stock market indicators are independent variables. The results presented in
table 4.4 indicate that only two coefficient sign is as expected. The coefficient
of market capitalization, turnover, volatility and NEPSE Index are negative.

The coefficient of market capitalization, value traded, turnover, volatility, size

of primary market and NEPSE index are -0.203, 3.525, -13.727, -0.198, 1.541
and -0.021 respectively. The coefficient of value traded is 3.525 which
shows that a change of 10% in the value traded may be the cause to the
corresponding change of about 35.25% in the gross domestic product if other
variables holding constant. But, as before, these results also must be viewed
skeptically as the number of observation is only eight. And same may be the
cause for the negative coefficients of market capitalization, turnover, volatility
and NEPSE Index, which is just the opposite of theorized relationship between
these variables with saving. But the result of Value Traded is significantly and
positively related to saving is encouraging sign.

The positive relation between Size of Primary Market has also the similar
explanation. And finally negative relationship of market capitalization,
turnover, volatility and NEPSE Index is not understandable the results may
have been driven by other factors or wrong assumptions.

54
The value of R2 is 0.98, which indicates there is sufficient variability in saving
explained by market capitalization, value traded, turnover, volatility, size of
primary market and NEPSE Index.

4.4.3 Multiple Regression between Investment (I) with Stock Market

Variables
It would be within the framework of this study to turn towards the relationship
between the Investment (I) and the stock market variables; Market
Capitalization (MC), Value Traded (VT), Turnover (TO), Volatility (V), Size
of Primary Market (PM) and NEPSE Index (NI) are investigated in table 4.5.

Table 4.5: Regression of Investment (I) on Market Capitalization (MC), Value

Traded (VT), Turnover (TO), Volatility (V), Size of Primary Market (PM) and
NEPSE Index (NI).

I = a + b1MC + b2VT + b3TO + b4V + b5PM + b6NI ………….. 4.3

Table 4.5

MC VT TO V PM NI R2

Estimated -0.111 2.089 15.061 0.125 0.578 -0.183 0.972

Coefficient

Standard 0.139 1.995 7.939 0.096 1.564 0.050

Error

Source: Appendix VII

Where

(i) Dependent Variable :- Investment (I)

(ii) Independent Variable: - Market Capitalization (MC), Value
Traded (VT), Turnover (TO), Volatility (V), Size of Primary
Market (PM) and NEPSE Index (NI).
(iii) R2 = Adjusted Coefficient of Multiple Determination

Table 4.5 present the results of regression where dependent variable is

investment and stock market indicators are independent variables. The results
presented in table 4.5 indicate that the estimated coefficients of value traded,
turnover, volatility and size of primary market have positive and expected signs
but the coefficients of market capitalization and NEPSE Index have negative
signs. The regression coefficients of value traded is 2.089, which indicates 10%

55
change in value traded will lead 20.89% change in investment. But the
regression coefficient of market capitalization and NEPSE Index are -0.111 and
-0.183 respectively, which indicates there is inverse relation between market
capitalization and NEPSE Index with investment. The regression coefficient of
turnover is 15.061, which is highly positive; it is because of comparison
between amount in rupees and percentage. Similarly the regression coefficient
of volatility and size of primary market is 0.125 and 0.578 respectively, which
indicates 10% change in size of primary market and volatility leads 1.25% and
5.78% change in investment respectively.

The value of R2 is 0.972, which indicates there is sufficient variability in

investment explained by market capitalization, value traded, turnover,
volatility, size of primary market and NEPSE Index.

4.4.4 Multiple Regression between Capital Formation (CF) with

Stock Market Variables
In the context of relationship of stock market and economic growth, finally this
study turns towards the relationship between capital formation (CF) a factor of
economic growth and stock market variables; Market Capitalization (MC),
Value Traded (VT), Turnover (TO), Volatility (V), Size of Primary Market
(PM) and NEPSE Index (NI) are investigated in table 4.6.

Table 4.6: Regression of Capital Formation (CF) on Market Capitalization

(MC), Value Traded (VT), Turnover (TO), Volatility (V), Size of Primary
Market (PM) and NEPSE Index (NI).

CF = a + b1MC + b2VT + b3TO + b4V + b5PM + b6NI ………….. 4.4

Table 4.6

MC VT TO V PM NI R2

Estimated -0.485 8.579 11.880 0.129 3.346 -0.412 0.993

Coefficient

Standard 0.165 2.369 9.426 0.114 1.857 0.059

Error

Source: Appendix VIII

Where,

(i) Dependent Variable :- Capital Formation (CF)

56
 (ii) Independent Variable: - Market Capitalization (MC), Value
Traded (VT), Turnover (TO), Volatility (V), Size of Primary
Market (PM) and NEPSE Index (NI).
(iii) R2 = Adjusted Coefficient of Multiple Determination

Table 4.6 presents the results of regression where dependent variable is capital
formation and stock market indicator are independent variables. The results
presented in table 4.6 indicate that the estimated coefficients of value traded,
turnover, volatility and size of primary market have positive and expected signs
but the coefficients of market capitalization and NEPSE Index have negative
signs. From the results presented in table 4.6, it can be seen that the coefficients
of four variables i.e. value traded, turnover, volatility and size of primary
market are positive which is consistent with the assumption of positive
relationship between capital formation and stock market development. But the
coefficient of two variables i.e. market capitalization and NEPSE Index are
negative which is not consistent with the assumption.

The value of R2 is 0.993 meaning that about 100% of the variability in capital
formation is explained by market capitalization, value traded, turnover,
volatility, size of primary market and NEPSE Index.

The analysis of the relationship between the stock market variables such a s
market capitalization, value traded, turnover, volatility, size of primary market
and NEPSE Index and the aggregate economic growth variables such as gross
domestic product, saving, investments and capital formation is performed. The
results obtained in analysis are mixed type. In some of the cases, the
relationship found to be consistent with the assumption.

The chapter presented the data and analyzed those data in the context of the
objectives of the study. In the next chapter, the major finding of the study,
summary and conclusion are outlined along with the recommendation for
future research possibilities in this area.

4.5 Major Findings

In this study, all the research data are secondary. With the help of the
secondary data, the researcher calculates the values related with relationship
between stock market and economic growth. Here the empirical findings are
presented separately below:

57
Trend Analysis

• The Market Capitalization in Nepal is gradually increasing after 2009/10

except the fiscal year 2014/15. This marks more and more individual as
well as institutional investors are involved in the market in subsequent
years. Market Capitalization, as measured NEPSE Index was in
fluctuate situation.
• While comparing the major indicators of stock market and economic
growth indicators, we found positive results. This certainly tells about
the positive relationship between financial markets and real activities in
the economy. Overall Nepalese economy seems fluctuating situation.
Though the increase in Market Capitalization is not very quick fast, but
keeping in mind the state of our economy, it is encouraging.

Correlation Analysis

• The coefficients of market capitalization (MC), the stock market

variable with various economic growth related variables: Gross
Domestic Product (GDP), Saving (S), Investment (I) and Capital
Formation (CF) are 0.78, 0.364101, 0.656967, and 0.5160487
respectively. All the coefficients are positive and highly significant
except Saving (S). Hence there is positive relationship between stock
market variable: MC and growth variables: GDP, S, I and CF.
• The Correlation coefficients of Value Traded (VT), the stock market
variable with various economic growth related variables: GDP, S, I and
CF are 0.705397, 0.290202, 0.63072 and 0.456568 respectively. All the
coefficients are positive. Hence there is also positive relationship
between the stock market variable VT and economic growth variables:
GDP, S, I and CF.
• The correlation coefficients of Size of Primary Market (PM), the stock
market variable with various economic growth indicators: GDP, S, I and
CF are -0.43062, -0.59885, -0.33936 and -0.44529 respectively. All the
coefficients are negative. Hence there is negative relationship between
Size of Primary Market and economic growth variables: GDP, S, I and
CF.
• The correlation coefficients of NEPSE Index (NI), the composite
indicator of secondary stock market with the various economic growth
indicators: GDP, S, I and CF are 0.21017, -0.21296, 0.197896 and -
0.07644 respectively. The coefficients are both positive and negative.
Hence there is mixed relationship between NEPSE Index and economic
growth variables: GDP, S, I and CF.

58
 Since, some of the coefficients are only negative and most of the
coefficients are positive, the researcher found that the relationship between
stock market and economic growth in Nepal is satisfactory.

Regression Analysis

• The estimated coefficients of GDP on MC and TO have positive and

expected signs. The casual relation tells that with the increase in the size
of the market as measured by MC and TO, the size of the economy as
measured by GDP, also increases. This result supports theoretical
assumption of Levine and Zervos (1998). But the estimated coefficients
of VT, V, PM and NEPSE Index have negative signs. These results are
consistent with assumption.
• The estimated coefficient of S on VT and PM have positive and
expected signs but the coefficient of MC, TO, V and NEPSE Index have
negative signs. The casual relation specifies that with the size of the
secondary stock market saving level of the economy also increases due
to the increased saving by firms and individuals.
• The regression coefficients of I and VT, TO, V and PM have positive
and expected signs but the coefficients of MC and NEPSE Index have
negative signs which is unexpected part of the study. So far, the cause of
results being insignificant concerned, there may be other factors such as
very small observation period, data dissertations and other invisible
factors.
• The regression coefficient of CF and VT, TO, V and PM have positive
and expected signs but the coefficient of MC and NEPSE Index have
negative signs which is unexpected part of the study.
• Though some of the relations are quite consistent with the theoretical
relationship of stock market variable and economic growth variables as
proposed by Levine and Zervos (1999).

59
 CHAPTER – V

SUMMARY, CONCLUSION AND

RECOMMENDATIONS
5.1 Summary
Stock market in Nepal promoted economic growth of the Nepalese economy.
Since stock market is a vehicle for economic growth in our context, the stock
market should be integrated into the whole economic system of the country
while designing economic policies. The key policy implication is that the
country requires a well-built and enabling stock market in order to accelerate
and maintain strong growth of the economy. Hence, meaningful efforts are
required on the part of the government to ensure well-organized and competent
operation of stock market because the more efficient the market, the more
possibility it will attract investors.

Stock market works as the medium to channelize the saving resources towards
the productive uses in the form of investment. Whereas secondary stock market
does it by influencing the perception of investors and firms about the economic
activities and prospect, the primary market plays the vital role directly in
increasing the investment level and thus, capital stock of firms through
mobilizing the savings of individual investors as well as institutional bodies.
An efficient stock market is the medium through which only productive firms
that have better performance can easily raise capital through primary markets.
This type of behavior of efficient market enhances the economic growth
process by the productivity growth. Stock markets also help agents manage
liquidity and productivity risk by eliminating premature capital liquidation
which also increases the firm's productivity. Stock market works as a vehicle
for raising capital for firms. Stock markets help investors to diversify their
wealth across variety of assets. The companies enjoy permanent access to
capital in firms that augment human capital and technologies. The more
resource allocated to the firms, the more rapid will be economic growth.
Efficient stock markets perform this role by reducing the liquidity risk to the
investors.

This study tries to assessing the role of stock market in economic growth in the
context of Nepal. The study is totally based on the secondary data. For the
purpose of the study objectives, the data on aggregate economic variables such
as Gross Domestic Product, Saving, Investment, Capital Formation and stock
market variables such as Market Capitalization, Value Traded, Turnover,

60
Volatility, Size of Primary Market and NEPSE Index were collected from the
fiscal year 2007/08 to 2014/15.

The main aim of this study is as follows:-

• To measure the relationship between stock market and economic growth in

context of Nepal. Specifically, the objectives of the study are set as:
first, to measure the relationship between various indicators of stock
market development such as Market Capitalization, Value Traded,
Turnover, Volatility, Size of Primary Market and NEPSE Index with
various indicators of economic growth such as Gross Domestic Product,
Saving, Investment and Capital Formation.
• To analyze the significance of the development of stock market in
economic growth.
• To examine the role of stock market in saving channelization and capital
mobilization, hence economic growth with the purpose of aggregate
analysis all the data on economic variables and stock market variables are
transformed into logarithm. It is done in order to have the comparison and
relation simple and more interpreting.
• Another reason was to have the analysis of simple line trend on the basis of
log values because these processes showed the direction of change more
clearly then the magnitude of change. Then correlation analysis is
performed so as to understand the simple association between the variables.
This analysis is done with the help of correlation matrix. Finally the
regression analysis is performed to find the casual association between
stock market variables and economic growth variables.

The results obtained from this analysis on the aggregate economic growth
variables and stock market variables should be viewed quite skeptically and
while drawing conclusion, a cautious and calculative process is required. The
main reason for this is that the observation period for the study is only 8 (from
2007/08 to 2014/15), because of unavailability of quarterly data, only yearly
data have been used which is not that much sufficient for the regression
analysis.

5.2 Conclusion
In this study the relationship between stock market and economic growth
seems the mixed result. Overall Nepalese economy is in fluctuating situation.
While calculating, the Trend Analysis is shown that the positive results
between economic growth and stock market.

61
In this study some of the coefficients are only negative and most of the
coefficients are positive, so that the relationship between stock market and
economic growth in Nepal is satisfactory.

In Regression analysis most of the values are positive, which signs are
expected and some of the values have negative signs which is unexpected part
of the study.

At last but not least a few very interesting inferences can be made from this
research.

5.3 Recommendations
As is found by the numerous research works, including this particular one, the
study has reached to the following recommendations are suggested.

• The Securities Board of Nepal has the responsibility of regulating the

entire securities market in Nepal. To make the Board effective, the
number of staff should be adequate and properly trained in all aspects of
securities market. It should bring new and emerging stock market
regulatory regimes to match international standards.
• Strong provisions via specific laws should be made to protect the rights
of the investors.
• Regulatory agencies should make favorable environment for online
trading, which make NEPSE transaction decentralized.
• DEMAT system should strictly be implemented.
• Prospective and incumbent investors should be made more aware about
the functioning mechanism of the market.
• Maximum possible information should be made available to the
investors at minimum possible costs.
• Timely and regular discourse of the information should be made
necessary for the participating firms. Provisions should be made so as to
necessitate the organizations to disclose their financial data at least
quarterly.
• Management of the listing and de-listing of the firms should be made
effective with the help of specific criteria.
• Market makers and investment bankers should be encouraged to
participate in the stock market.
• Specific provisions should be made to attract the foreign portfolio
investment in the domestic market.
• Ways of transaction should be rectified and modified via automated
quotation and appropriate technology.
62
If the necessary measures are taken towards making the Nepalese stock market
more efficient, not only investors and participating firms but the whole
economy is likely to benefit. Since, the efficiency of the market may be the
cause for the efficiency of the economy; this goal should be pursued by
concerning authorities more vigorously and seriously.

Finally, there is a lot of scope for research in this particular field. Finding the
contribution of stock market to the economy and research study in this area are
new phenomena. Therefore, in case of Nepal, as well, the extended and
comprehensive study in this field will be just as timely and appropriate. Even,
this particular study can be extended by including more and more specific
variables and designing the research ore appropriately. Another aspect of future
research may be not merely the casual relationship between stock market and
economic growth variables but mainly focus on the channels through which the
stock market are able to influence the growth process positively.

The government should remove impediments to stock market development in

the form of tax, legal and regulatory barriers because they are sometimes
disincentives to investment, should invest more and develop the nation’s
infrastructure in order to create an enabling environment for businesses to
grow, increase the productivity and efficiency, and the rate of returns of firms,
should employ appropriate trade policies that promote the inflow of
international capital and foreign investment so as to enhance the production
capacity of the nation, and should strengthen the capacity of the Nepal Stock
Exchange so as to check and prevent sharp practices by market operators in
order to safeguard the interest of shareholders. Moreover, the Nepal Stock
Exchange should improve the trading system in order to increase the ease with
which investors can purchase and sell shares, thus guaranteeing liquidity on the
stock market. Besides, stock market reformation policies may give a further
support to the economy and may act as a key enabler and catalyst of economic
growth.

Studies on the role of stock market on expansion of the corporate base,

industrialization, technological advances and employment generations will not
be out of place considering the early stage of our stock market and its
efficiency level.

63
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www.worldbank.org
 APPENDIX – I
Monthly NEPSE Index from the fiscal year 2007/08 to 2014/15 (Base: 1994, Feb = 100)

Year Month Index Year Month Index

2007/08 July/Aug 706 2009/10 July/Aug 721.95
Aug/Sept 817.1 Aug/Sept 628.34
Sept/Oct 861.4 Sept/Oct 609.55
Oct/Nov 661.94
Oct/Nov 915.4
Nov/Dec 548.61
Nov/Dec 1025.9
Dec/Jan 530.96
Dec/Jan 958.9
Jan/Feb 528.9
Jan/Feb 814.4 Feb/March 486.25
Feb/March 814.4 March/April 481.19
March/April 746.7 April/May 457.81
April/May 806.3 May/June 476.69
May/June 930.7 June/July 477.93
June/July 963.4
Year Month Index Year Month Index
2008/09 July/Aug 1084.76 2010/11 July/Aug 453.7
Aug/Sept 976.01 Aug/Sept 404.43
Sept/Oct 933.97 Sept/Oct 420.3
Oct/Nov 806.9 Oct/Nov 424.93
Nov/Dec 734.85 Nov/Dec 394.17
Dec/Jan 659.81 Dec/Jan 402.75
Jan/Feb 663.52 Jan/Feb 405.03
Feb/March 667.2 Feb/March 384.17
March/April 661.27 March/April 373.2
April/May 660.96 April/May 364.44
May/June 978.74 May/June 297.62
June/July 749.1 June/July 362.85
Year Month Index Year Month Index
2011/12 July/Aug 404.43 2013/14 July/Aug 536
Aug/Sept 420.3 Aug/Sept 552
Sept/Oct 424.93 Sept/Oct 572

Oct/Nov 394.17 Oct/Nov 600

Nov/Dec 733
Nov/Dec 402.75
Dec/Jan 787
Dec/Jan 405.03
Jan/Feb 798
Jan/Feb 384.17
Feb/March 783
Feb/March 373.2
March/April 818
March/April 346.44
April/May 852
April/May 297.62 May/June 905
May/June 362.85 June/July 1036
June/July 389.74
Year Month Index Year Month Index
2012/13 July/Aug 398.28 2014/15 July/Aug 1034
Aug/Sept 420.83 Aug/Sept 920
Sept/Oct 427.36 Sept/Oct 924
Oct/Nov 480.85 Oct/Nov 866
Nov/Dec 496.24 Nov/Dec 917
Dec/Jan 529.69 Dec/Jan 940
Jan/Feb 514.77 Jan/Feb 985
Feb/March 546.14 Feb/March 978
March/April 523.41 March/April 948
April/May 490.58 April/May 938
May/June 494.38 May/June 934
June/July 518.33 June/July 961.23
 APPENDIX – II
Indicators of Economic Growth

Year GDP Savings Investments Capital Formation

2007/08 522.3000 51.1854 114.3837 158.2569
2008/09 542.7000 51.0138 115.5951 172.0359
2009/10 565.8000 64.5012 125.6076 216.7014
2010/11 587.5000 82.2500 125.7250 223.2500
2011/12 614.6000 67.6060 127.8368 212.0370
2012/13 637.8000 67.6068 144.1428 237.8994
2013/14 670.0000 73.0300 159.4600 271.3500
2014/15 690.3000 78.6942 130.3930 213.0758
 APPENDIX – III
Indicators of Stock Market

Market Turnover Size of Primary NEPSE

Year Value Traded Volatility
Capitalization (%) Market Index
2007/08 366.2475 22.8208 6.230977686 100.09 9.96082 963.36
2008/09 512.939 21.6811 4.226837889 148.13 16.82085 749.1
2009/10 376.8713 11.8511 3.144601353 81.88 10.82024 477.73
2010/11 323.4843 6.6653 2.060470941 37.69 6.8504 362.85
2011/12 368.2621 10.2728 2.789534954 33.88 2.95001 389.74
2012/13 514.4921 22.0488 4.285546853 45.89 10.68052 518.33
2013/14 1057.1658 77.2985 7.311861583 148.61 7.26028 1036.11
2014/15 989.4 65.332 6.603193855 39.96 8.89031 961.23
 APPENDIX – IV
Log Values of Economic Growth and Stock Market Indicators

Size of
Market Value Turnover
Volatility Primary NEPSE Index
Capitalization Traded (%)
Year GDP Savings Investments Capital Formation Market
2007/08 2.71792 1.709146 2.058364141 2.199362654 2.563774669 1.358331 0.794556 2.000390689 0.998295092 2.98378861
2008/09 2.73456 1.707688 2.062939425 2.235619084 2.710065721 1.336081 0.626016 2.170643023 1.225847938 2.874539797
2009/10 2.752663 1.809568 2.099015918 2.335861717 2.576193066 1.073759 0.497566 1.913177834 1.034236894 2.679182515
2010/11 2.769008 1.915136 2.099421644 2.348791468 2.509853207 0.82382 0.313966 1.576226137 0.835715931 2.559727127
2011/12 2.788593 1.829985 2.106655891 2.326411651 2.566157025 1.011689 0.445532 1.529943402 0.469823488 2.590774981
2012/13 2.804685 1.82999 2.158792954 2.376393347 2.711378711 1.343385 0.632006 1.661718058 1.028592398 2.714606346
2013/14 2.826075 1.863501 2.20265176 2.433529826 3.024143105 1.888171 0.864028 2.172048034 0.86095337 3.015405865
2014/15 2.839038 1.895943 2.115254277 2.328534128 2.995371906 1.815126 0.819754 1.60162548 0.948916905 2.982827317
 APPENDIX – V
Data for calculation of Multiple Regression between Gross Domestic Product with Stock Market Variables

Regression Statistics
Multiple R 0.99794868
R Square 0.995901568
Adjusted R Square 0.971310979
Standard Error 10.16722301
Observations 8

ANOVA
df SS F Significance F
Regression 6 25119.06258 4186.51 40.4993 0.119708045
Residual 1 103.3724238 103.3724
Total 7 25222.435

Lower Upper
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 528.2841857 68.4311 7.719944 0.082008 -341.2153108 1397.783682 -341.215 1397.784
Market Capitalization 0.367026089 0.2131 1.722189 0.33491 -2.340870281 3.074922459 -2.34087 3.074922
Value Traded -2.065363429 3.0534 -0.67641 0.621389 -40.86251905 36.73179219 -40.8625 36.73179
Turnover (%) 25.89196806 12.1480 2.131373 0.279279 -128.4633169 180.247253 -128.463 180.2473
Volatility -0.27687321 0.1470 -1.88389 0.310667 -2.144287245 1.590540824 -2.14429 1.590541
Size of Primary Market -2.467382414 2.3927 -1.03122 0.490216 -32.8692717 27.93450687 -32.8693 27.93451
NEPSE Index -0.210385272 0.0767 -2.74396 0.222484 -1.184597045 0.763826502 -1.1846 0.763827
 APPENDIX – VI
Data for calculation of Multiple Regression between Saving with Stock Market Variables

Regression Statistics
Multiple R 0.99001334
R Square 0.980126414
Adjusted R Square 0.860884897
Standard Error 4.272028425
Observations 8

ANOVA
df SS MS F Significance F
Regression 6 900.0655092 150.0109 8.219674 0.260844514
Residual 1 18.25022686 18.25023
Total 7 918.3157361

Lower Upper
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 155.422193 28.75313941 5.405399 0.116458 -209.9210831 520.7654692 -209.921 520.7655
Market Capitalization -0.2031 0.0895 -2.26826 0.264345 -1.340908949 0.93468002 -1.34091 0.93468
Value Traded 3.5249 1.2830 2.74746 0.222224 -12.77675095 19.82655703 -12.7768 19.82656
Turnover (%) -13.7270 5.1043 -2.68929 0.226638 -78.58342584 51.12950839 -78.5834 51.12951
Volatility -0.1980 0.0618 -3.20682 0.192437 -0.982673573 0.586613503 -0.98267 0.586614
Size of Primary Market 1.5413 1.0053 1.533114 0.367945 -11.23284635 14.31547397 -11.2328 14.31547
NEPSE Index -0.0212 0.0322 -0.65856 0.629251 -0.430557054 0.38812478 -0.43056 0.388125
 APPENDIX – VII
Data for calculation of Multiple Regression between Investment with Stock Market Variables

Regression Statistics
Multiple R 0.98575348
R Square 0.972
Adjusted R Square 0.801969466
Standard Error 6.644183744
Observations 8

ANOVA
df SS MS F Significance F
Regression 6 1516.302278 252.717 5.724681 0.309471127
Residual 1 44.14517763 44.14518
Total 7 1560.447456

Lower Upper
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 171.451 44.719 3.833964 0.162429 -396.7583719 739.6609656 -396.758 739.661
Market Capitalization -0.111 0.139 -0.7965 0.571806 -1.880513147 1.658656009 -1.88051 1.658656
Value Traded 2.089 1.995 1.046681 0.485483 -23.26505847 27.4420875 -23.2651 27.44209
Turnover (%) 15.061 7.939 1.897143 0.308823 -85.80901546 115.9304121 -85.809 115.9304
Volatility 0.125 0.096 1.304436 0.416381 -1.095055865 1.345618831 -1.09506 1.345619
Size of Primary Market 0.578 1.564 0.36956 0.774641 -19.28950491 20.44518731 -19.2895 20.44519
NEPSE Index -0.183 0.050 -3.65611 0.169968 -0.81982568 0.453450616 -0.81983 0.453451
 APPENDIX – VIII
Data for calculation of Multiple Regression between Capital Formation with Stock Market Variables

Regression Statistics
Multiple R 0.996465365
R Square 0.993
Adjusted R Square 0.950602566
Standard Error 7.888931646
Observations 8

ANOVA
df SS MS F Significance F
Regression 6 8756.981876 1459.497 23.45129 0.15676923
Residual 1 62.23524251 62.23524
Total 7 8819.217118

Lower Upper
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% 95.0% 95.0%
Intercept 416.664 53.097 7.847232 0.080692 -257.9964673 1091.324205 -257.996 1091.324
Market Capitalization -0.485 0.165 -2.9315 0.209285 -2.585859716 1.616351515 -2.58586 1.616352
Value Traded 8.579 2.369 3.621223 0.171528 -21.52404695 38.68277814 -21.524 38.68278
Turnover (%) 11.880 9.426 1.260368 0.426991 -107.8869797 131.6471175 -107.887 131.6471
Volatility 0.129 0.114 1.1328 0.460412 -1.319780626 1.578139809 -1.31978 1.57814
Size of Primary Market 3.346 1.857 1.802477 0.322457 -20.24303301 26.93571504 -20.243 26.93572
NEPSE Index -0.412 0.059 -6.93091 0.091223 -1.168237267 0.343579692 -1.16824 0.34358