THE EFFECT OF BUDGET ANNOUNCEMENT ON THE PRICES

OF SECURITIES LISTED ON THE DHAKA STOCK EXCHANGE

Prepared for:
Dr. Jahangir Alam
Course Instructor
Portfolio Management

Prepared by:
Nayeem Alam (ZR 14)
Asif Hasan (ZR 65)
Yusuff Reffaie (ZR 69)
Jyoty Bikash Dev Nath (ZR 71)
Batch 17

Institute of Business Administration

University of Dhaka
November 15, 2012

BACKGROUND
Monetary policy is the process by which the government, central bank, or monetary
authority of a country controls
(i)
(ii)
(iii)

the supply of money

availability of money
cost of money or rate of interest to attain a set of objectives oriented
towards the growth and stability of the economy.

In all countries, the central bank sets the monetary policies of a particular financial
year by the circulation of a countrys Monetary Policy Statement (MPS). This
publication covers the broad economic and financial reviews of that country and
clearly states the goals of the central bank which it intends to achieve in the interim
periods. The statistics covered in an MPS include
1. GDP
2. Inflation Rate
3. Foreign Exchange Reserve
The MPS is also used to measure the deviations of these factors from their preset
targets and determines if the deviations are temporary or permanent.
MPS can take an expansionary or a restrictive stance for the countrys economy.
This stance has an effect on the stock prices of the financial institutions because it
sets the growth of broad money (M2). This in turn reflects the overall credit growth
within the economy. A restrictive monetary policy will tighten the credit growth to
limit inflation; whereas an expansionary one will liberalize credit growth. Thus, in
addition to its effects on demand across the economy, monetary policy also can
influence long-term interest rates that banks and other lending institutions charge
for home and business loans, credit cards and other types of credit.
Hence, monetary policy stance has a significant impact on banks earnings and also
on their valuation. This impact is also documented on their stock prices. Therefore,
this study will try to analyze the effect of the MPS on the countrys banks, and the
extent of this impact. This will actually be an event study to evaluate the semistrong efficient market hypothesis in regard to the banking sector of Bangladesh.
BROAD OBJECTIVE
To carry out an event study to test the semi-strong efficient market hypothesis with
respect to the banking sector of Bangladesh. The event shall be the circulation of
Bangladesh Banks Monetary Policy Statement.

SPECIFIC OBJECTIVES
To review the MPS of FY 2012-13 in terms of tight or expansionary stance;
To identify the top 10 banks to represent the banking sector of Bangladesh
based on their market capitalization;
To determine speculative share price fluctuations of these banks 10 days
before the circulation of the MPS;
To determine market response in terms of share price changes within 10 days
after the circulation of the MPS;
To identify and analyze the presence of any correction of the market response
(if any) within 30 days after the circulation of the MPS;
To evaluate the sectors semi-strong form efficiency (if any) in light of the 40
days range of stock prices covering the pre and post circulation of the MPS.
SCOPE
The effect of the Annual Budget Announcement of FY 2012-13 on prices of common
stock listed on the Dhaka Stock Exchange will be analyzed only. Change in prices of
the stock will be considered for one month before and one month after the
announcement of the annual budget.

METHODOLOGY
All information used for this study will be collected from secondary sources which
include:

Dhaka Stock Exchange Website

Dhaka Stock Exchange Library
Business Journals
Newspapers

The two main information stock prices during the period in context and the date of
budget announcement will be collected from the following sources:
Secondary data in the form of stock prices and policy statements will be used
to test the effect of MPS.
Stock price data will be collected from the banking sector of the DSE of the
selected companies.
The date of budget announcement will be collected from newspapers.
DATA COLLECTION
This section deals with sample size determination.

For the purpose of this report, since the size of the population is 292 (the number of
stock listed on the DSE), a sample will be used instead for hypothesis testing. The
sampling method used will be STRATIFIED RANDOM SAMPLING.

SAMPLE SIZE DETERMINATION

To find out the number of listed companies to be analyzed, the following formula
has been used to determine the sample size:
2

NZ 0 .25
n= 2
[ d ( N1 ) ] + [ Z20 . 25 ]

Where,
n = Sample Size Required
N

Total

Population

Size

(Known or Estimated)
d = Precision Level
Z = Standard Deviation
The population, which consists of all the stocks listed on the Dhaka Stock Exchange
(DSE), for this study is 292. For the purpose of this work, we believe working with
95% confidence level and 10 percent precision level (d = 0.10, Z = 1.96) is
appropriate. Therefore, our sample size, n is:

2921 . 9620 . 25
n=
=72. 46
[ 0 . 102( 2921 ) ]+ [ 1. 96 20 . 25 ]
Therefore, a representative sample of 73 would be sufficient to satisfy the
confidence level and precision level that is being sought for this study.
So, total sample size = 73
DATA ANALYSIS
For the purpose of analysis, Microsoft Excel and SPSS would be used to find out the
following.
Correlation of stock prices with the announcement of the annual budget
Hypothesis testing will be conducted using ANOVA model.

Course material and other books will be used to get a bettering understanding the
possible effects of the budget announcement on stock prices from a theoretical
standpoint.
LIMITATION
Other macro-economic events might affect the companies stock prices
before, during and after the budget is announcement. This study will not take
into account those events, which might cause the results to be distorted.
There might be presence of market manipulation, which shall not be
considered.
Share prices may be impacted by each firms specific factors. While analyzing
the effect of budget announcement, these factors will not be considered.

DEFINITION OF 'STRATIFIED RANDOM SAMPLING'

A method of sampling that involves the division of a population into smaller groups
known as strata. In stratified random sampling, the strata are formed based
on members' shared attributes or characteristics. A random sample from each
stratum is taken in a number proportional to the stratum's size when compared to
the population. These subsets of the strata are then pooled to form a random

sample.

INVESTOPEDIA EXPLAINS 'STRATIFIED RANDOM SAMPLING'

The main advantage with stratified sampling is how it captures key population
characteristics in the sample. Similar to a weighted average, this method of
sampling produces characteristics in the sample that are proportional to the overall
population. Stratified sampling works well for populations with a variety of
attributes, but is otherwise ineffective, as subgroups cannot be formed.
Read
more:
http://www.investopedia.com/terms/stratified_random_sampling.asp#ixzz2DYV38e6
G

In statistics, stratified sampling is a method of sampling from a population.

In statistical surveys, when subpopulations within an overall population vary,

it is advantageous to sample each subpopulation (stratum) independently.
Stratification is the process of dividing members of the population into
homogeneous subgroups before sampling. The strata should be mutually
exclusive: every element in the population must be assigned to only one
stratum. The strata should also be collectively exhaustive: no population
element can be excluded. Then simple random sampling or systematic
sampling is applied within each stratum. This often improves the
representativeness of the sample by reducing sampling error. It can produce
a weighted mean that has less variability than the arithmetic mean of a
simple random sample of the population.
In computational statistics, stratified sampling is a method of variance
reduction when Monte Carlo methods are used to estimate population
statistics from a known population.
1. Proportionate allocation uses a sampling fraction in each of the strata that is
proportional to that of the total population. For instance, if the population
consists of 60% in the male stratum and 40% in the female stratum, then the
relative size of the two samples (three males, two females) should reflect this
proportion.
2. Optimum allocation (or Disproportionate allocation) - Each stratum is
proportionate to the standard deviation of the distribution of the variable.
Larger samples are taken in the strata with the greatest variability to
generate the least possible sampling variance.

The population should consist of no more than six strata.

A real-world example of using stratified sampling would be for a political
survey. If the respondents needed to reflect the diversity of the population,
the researcher would specifically seek to include participants of various
minority groups such as race or religion, based on their proportionality to the
total population as mentioned above. A stratified survey could thus claim to
be more representative of the population than a survey of simple random
sampling or systematic sampling.
Similarly, if population density varies greatly within a region, stratified
sampling will ensure that estimates can be made with equal accuracy in
different parts of the region, and that comparisons of sub-regions can be
made with equal statistical power. For example, in Ontario a survey taken
throughout the province might use a larger sampling fraction in the less
populated north, since the disparity in population between north and south is
so great that a sampling fraction based on the provincial sample as a whole
might result in the collection of only a handful of data from the north.

Randomized stratification can

representativeness in a study.

also

be

used

to

improve

population

PRACTICAL EXAMPLE
In general the size of the sample in each stratum is taken in proportion to the
size of the stratum. This is called proportional allocation. Suppose that in a
company there are the following staff:[1]

male, full-time: 90

male, part-time: 18

female, full-time: 9

female, part-time: 63

Total: 180

and we are asked to take a sample of 40 staff, stratified according to the

above categories.
The first step is to find the total number of staff (180) and calculate the
percentage in each group.

% male, full-time = 90 / 180 = 50%

% male, part-time = 18 / 180 = 10%

% female, full-time = 9 / 180 = 5%

% female, part-time = 63 / 180 = 35%

This tells us that of our sample of 40,

50% should be male, full-time.

10% should be male, part-time.

5% should be female, full-time.

35% should be female, part-time.

50% of 40 is 20.

10% of 40 is 4.

5% of 40 is 2.

35% of 40 is 14.

Another easy way without having to calculate the percentage is to multiply

each group size by the sample size and divide by the total population size
(size of entire staff):

male, full-time = 90 x (40 / 180) = 20

male, part-time = 18 x (40 / 180) = 4

female, full-time = 9 x (40 / 180) = 2

female, part-time = 63 x (40 / 180) = 14

1 Bank 30
2 Cement 6
3 Ceramics Sector 5
4 Corporate Bond 3
5 Debenture 8
6 Engineering 23
7 Financial Institutions 22
8 Food & Allied 16
9 Fuel & Power 14
10 Insurance 45
11 IT Sector 6
12 Jute 3
13 Miscellaneous 9
14 Mutual Funds 41
15 Paper & Printing 1
16 Pharmaceuticals & Chemicals 20

17 Services & Real Estate 4

18 Tannery Industries 5
19 Telecommunication 2
20 Textile 26
21 Travel & Leisure 3
Total 292

Methodology:
Hypothesis Testing:
In order to get an in-depth understanding of the impact different events have on the
price and returns of stocks, hypothesis test will be conducted. In general our capital
market is considered as semi-strong market. In semi-strong efficient market
hypothesis, it is assumed that current security prices rapidly adjust to all public
information. So, we will test whether our security market remains semi-strong form
efficient after the revelation of public information using a 2-tailed hypothesis
testing. In other word the hypothesis being tested is:
H0: There is no difference between the stock returns during the event period
(i.e. around the budget) and the stock returns in pre-event period. The stock
market is semi-strong efficient.
H1: There is a difference between the stock returns during the event period
and the stock returns in the pre-event period. The stock market is not semistrong efficient.
Two types of public information will be considered to conduct the hypothesis
testing:

Market Information: stock prices, rates of return, trading volume

Non-market Information: periodic earnings, announcement of dividends,
price-earnings ratio etc.

We are going to use event studies to study the semi-strong form of market
efficiency. Using financial market data, an event study measures the impact of a
specific event on the value of a firm. The usefulness of such a study comes from the
fact that, given rationality in the marketplace, the effects of an event will be
reflected immediately in security prices. Thus a measure of the events economic
impact can be constructed using security prices observed over a relatively short
time period. In our study, a 15-day event window will be employed, consisting 7 preevent days, the event day and 7 post-event days. The following events will be
examined for hypothesis testing:
o
o
o
o
o
o
o

Stock Splits
Initial Public Offerings
Listing of stocks on an exchange
Unexpected world events
Unexpected economic events
Announcement of significant accounting changes
Corporate events