Central bank links stock market volatility to insider trading
Friday, 5 December 2008
Shakhawat Hossain
The Bangladesh Bank (BB) said a major weakness of the local capital market is its inability to reflect the company fundamentals adequately.
The danger of insider trading in manipulating market prices has been identified by the BB as another main problem which is leading to market volatility.
"A major weakness of the market, however, is its inability to reflect the company fundamentals adequately along with the danger of insider trading in manipulating market prices," according to a BB study report.
The report titled 'Financing Long Term Investments in Bangladesh: Capital Market Development Issues' said: "For sustained development, it is also important to reduce volatility in the market, which has shown increasing trend in recent years."
The BB said the average price-earning (P/E) ratio of listed companies on Dhaka Stock Exchange (DSE) rose to 22.8 in June 2008 from 12.1 in December 2007 and 17.3 in June 2007.
"From the perspective of the investors, a higher P/E ratio is risky since this may be due to the fact that current prices do not reflect company fundamentals raising the possibility of price fall in future," said the BB.
The average volatility of DSI (a market barometer), as measured by standard deviation, was recorded at 46.2 in FY08 which shows significant rise over earlier years, the BB added.
The central bank suggested for the development of the secondary bond market to reduce the undue price volatility in the stock market although it admitted that a well-developed tradable bond market was critical.
"The development of the secondary bond market is required for reducing the undue price volatility in the stock market," the BB said.
"Like in any other country, a well-developed tradable bond market is critical to ensuring stability and efficiency of the financial market in Bangladesh." said the BB.
The BB observed that the country's capital market was small and had a heterogeneous composition compared with developed and well functioning capital markets in the presence of a bank-dominated financial system.
As the dependence on bank loan is substantial, the debt market, which means corporate debt market, has played a minor role in investment financing in the country even in recent years.
In FY08, the amount of industrial term loans disbursed by banks and NBFIs stood at Tk 201.5 billion (of which the amount disbursed by NBFIs was Tk. 23.9 billion) compared with only Tk. 6.9 billion by new capital issues through private placements, public offerings, and right offerings in the capital market.
The Bangladesh Bank (BB) said a major weakness of the local capital market is its inability to reflect the company fundamentals adequately.
The danger of insider trading in manipulating market prices has been identified by the BB as another main problem which is leading to market volatility.
"A major weakness of the market, however, is its inability to reflect the company fundamentals adequately along with the danger of insider trading in manipulating market prices," according to a BB study report.
The report titled 'Financing Long Term Investments in Bangladesh: Capital Market Development Issues' said: "For sustained development, it is also important to reduce volatility in the market, which has shown increasing trend in recent years."
The BB said the average price-earning (P/E) ratio of listed companies on Dhaka Stock Exchange (DSE) rose to 22.8 in June 2008 from 12.1 in December 2007 and 17.3 in June 2007.
"From the perspective of the investors, a higher P/E ratio is risky since this may be due to the fact that current prices do not reflect company fundamentals raising the possibility of price fall in future," said the BB.
The average volatility of DSI (a market barometer), as measured by standard deviation, was recorded at 46.2 in FY08 which shows significant rise over earlier years, the BB added.
The central bank suggested for the development of the secondary bond market to reduce the undue price volatility in the stock market although it admitted that a well-developed tradable bond market was critical.
"The development of the secondary bond market is required for reducing the undue price volatility in the stock market," the BB said.
"Like in any other country, a well-developed tradable bond market is critical to ensuring stability and efficiency of the financial market in Bangladesh." said the BB.
The BB observed that the country's capital market was small and had a heterogeneous composition compared with developed and well functioning capital markets in the presence of a bank-dominated financial system.
As the dependence on bank loan is substantial, the debt market, which means corporate debt market, has played a minor role in investment financing in the country even in recent years.
In FY08, the amount of industrial term loans disbursed by banks and NBFIs stood at Tk 201.5 billion (of which the amount disbursed by NBFIs was Tk. 23.9 billion) compared with only Tk. 6.9 billion by new capital issues through private placements, public offerings, and right offerings in the capital market.