Portfolio Management (F402) Proposal for Term paper

Analysis of Five Year Stock Market Data of Three Banks in Bangladesh

Prepared for: Dr. Md. Jahangir Alam Professor & Course Instructor

Prepared by: Injamam Alam (ZR 70) Kazi Noman Ahmed (ZR 74) Takmil-Ul-Ihsan (ZR 85) Akif Ahmed (ZR 104)

21 November 2013 Institute of Business Administration University of Dhaka

Introduction

As per Portfolio Management course requirement, we have to do a 5-year analysis on three companies from a specific industry in Dhaka Stock Exchange. Through lottery, Bank became our subject industry. First incorporated as East Pakistan Stock Exchange Association Ltd in 28 April 1954 and started formal trading in 1956. It was renamed as East Pakistan Stock Exchange Ltd in 23 June 1962. Again renamed as Dacca Stock Exchange Ltd in 13 May 1964. After the liberation war in 1971 the trading was discontinued for five years. In 1976 trading restarted in Bangladesh, on 16 September 1986 DSE was started. The formula for calculating DSE all share price index was changed according to IFC on 1 November 1993. The automated trading was initiated in 10 August 1998 and started on 1 January 2001. A Central Securities Depository System was initiated in 24 January 2004. As of November 16, 2009, the benchmark index of the Dhaka Stock Exchange (DSE) crossed 4000 points for the first time, setting another new high at 4148 points. In 2010, the index crossed 8500 points and finally crashed in the first quarter of 2011 (Wikimedia Foundation, 2013). The market is recovering from the crash and is now at 4500 point region (DSE, 2013). In finance, the efficient-market hypothesis (EMH), or the joint hypothesis problem, asserts that financial markets are "informationally efficient". In consequence of this, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. Beyond the normal utility maximizing agents, the efficient-market hypothesis requires that agents have a rational expectation; that on average the population is correct (even if no one person is) and whenever new relevant information appears, the agents update their expectations appropriately. Note that it is not required that the agents be rational. EMH allows that when faced with new information, some investors may overreact and some may underreact. In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner (Wikimedia Foundation, 2013).

2 Chosen Banks from Banking Sector in Dhaka Stock Exchange

Banking sector of Bangladesh is one of the major sectors, which contributes significantly to the national economy. Economic development - of the country is executed by the contribution of various economic sectors. Like agriculture, industries, power, transport, trade service, etc., banking sector also has a contribution to the economic growth. In mid 80s Banking and Insurance contributed 1.69% of GDP and gradually the figure was increasing. The maximum contribution was 2.09% of GDP in the year 1993 and it was 2.00% in 1996-97. Average growth rate of this contribution was 1.51% of 1|Page

GDP, which shows a positive trend. Again, the sector makes a positive impact on the economic development by generating employment. In the year 1980 total number of employees in this sector was 59,235 but within 15 years of time the figure shoot approximately double to 101,444.The average growth rate of employment generation was 3.76% (1980-1995). Countries like Bangladesh have a burden of its unemployment, where as banking sector still keep certain impact on employment generation (Siddique & Islam, 2001). There are 30 banks registered in the Dhaka Stock Exchange. Among them, we have chosen the following banks for data analysis: AB Bank Ltd. BRAC Bank Ltd. Dutch Bangla Bank Ltd.

Objectives

To test for Semi Strong Form Efficient Market hypothesis through time series analysis in the banking sector from 2009 to 2013. The Semi Strong Form Efficient Market hypothesis assumes that investors expectations made on new public information should not lead to above average risk adjusted profits from transactions.

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Hypotheses

1. Dividend Yield Ratio Investors cannot predict future abnormal returns from public information regarding dividend yield ratio i.e. there is no correlation between dividend yield ratio and stock prices. So, mathematically: Ho: Div. Yieldrstock price 0 Ha: Div. Yieldrstock price= 0 2. Quarterly Earnings Report Investors cannot predict future abnormal returns from quarterly earnings reports, i.e. prices before, during and after the quarterly earnings report dont show abnormal movements So, mathematically: Ho: %of return before Quarterly report - %of return before Quarterly report 0 Ha: %of return before Quarterly report - %of return before Quarterly report = 0 3. January Anomaly Investors cannot predict abnormal future returns based on time of year. It can be said that i. prices during May-June are not statistically different from prices during July

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ii.

prices did not consistently increase or decrease at specific time of the year from 2009 to 2013

So, mathematically: Ho: Price (July) - Price (May) 0 Ha: Price (July) - Price (May) = 0 Ho: Price (July) - Price (May) 0 Ha: Price (July) - Price (May) = 0 4. Calendar Effects Investors cannot predict abnormal future returns based on time of month, week or day. It can be said that prices did not consistently increase or decrease at specific time of month or week from 2009 to 2013

Proposed methodology

Transaction data of the selected banks will be collected from DSE Library. The obtained data will be tested statistically to test these hypotheses. Microsoft Excel and IBM SPSS will be used to run the tests. The test parameters and the definitions will be selected/ defined based on existing literature and the instruction of the course instructor. For the validity and reliability of the research, we will determine the alpha value.

5 Scope of Work
The tests will give results for the period from 2009 to 2013. Whatever result is obtained, only holds true for that specific time period. The tests will give results for the banking sector by taking 3 banks out of the 30 listed banks. The results obtained may not hold true for other industries.

6 Rationale
This term paper will help us understand the concept of Semi Strong Form Efficient Market Hypothesis.

7 Limitation
Data collection from only three banks will be tested. Only data of last five years will be used for analysis. Among all the sectors, only banking sector is being tested for Semi Strong Form Efficient Market Hypothesis.

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8 Bibliography
Banking Sector in Bangladesh: Its Contribution and Performance 2001 Journal of Business Research, vol. 3 1-10 DSE2013 Recent Information Wikimedia Foundation 2013Dhaka Stock Exchange Wikimedia Foundation 2013Efficient Market Hypothesis

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