Impact of foreign exchange reserves in the stock market in Karachi Pakistan
Summary
This article explains the relationship between foreign exchange reserves of Pakistan and the KSE market capitalization on the basis of quarterly data gathered from fiscal year 2001-2009. Both of variables under study are very important because foreign exchange reserves is one of the main supports to stabilize the national currency's value against foreign currencies and capitalization market indicates that the overall investment in the stock market. This study uses the simple linear regression model to measure the relationship between these two important variables. The results of this study show that is positive (nonsignificant positive) relationship between variables. The results show that foreign exchange reserves of Pakistan have an impact positive Securities Market KSE is the main stock market in Pakistan.
Introduction
This research is carried out to find the impact of foreign exchange reserves held by the State Bank of Pakistan on investment and return on the stock markets of Pakistan. There three stock exchanges (Karachi Stock Exchange, Lahore Stock Exchange and the Islam-Abad Stock Exchange) that operate in Pakistan. Karachi Stock Exchange (KSE) is the principal, largest and most popular stock market in the country, so it is used as representative of all exchanges in Pakistan.
About KSE
KSE is the center of capital formation in Pakistan, established on September 18, 1947. KSE began with five companies with a paid up capital of Rs. 37 million. The first index is the index of 50 and trading is done through open system would mourn.
In spite of the political, social, problems financial and otherwise, who played a key role in the economy of Pakistan. KSE 100 index showed a return of 40.19% and became the sixth among the best performers in emerging markets in calendar year 2007. Important milestone was achieved by touching the KSE-100 Index psychological level 15,000 for the first time in its history and reached its peak of 15737.32 on 20 April 2008. In addition, increased 7.4 percent in 2008 and became the best performance among the major emerging markets (Gulf News, 2008). It was declared "Best Performing Stock Market of the World 2002" as stated by the international magazine "Business Week" Similarly, the U.S. newspaper "USA Today," said Karachi Stock Exchange as one of the best performing exchange in the world. By June 1, 2009 there were 651 listed companies with market capitalization of KSE U.S. $ 26,480,000,000 of capital which included U.S. $ 9,650,000,000. Change was owned by 200 members / brokers through e-commerce system. (Karachi Stock Exchange, 2009)
Change in foreign exchange reserves
Foreign exchange is the currency of other countries and foreign exchange reserves means the international currency deposits held by central banks. International reserves allow governments to keep their currencies stable, the reserves are used as an instrument of exchange and monetary policy, facilitate the payment of debt and foreign liabilities, which act as a defense against unexpected emergencies and crises economic.
To know about the relationship of foreign exchange reserves with the stock market is important above reasons and due to the accumulation of international reserves has been the preferred policy recently adopted by developing economies to achieve financial stability. The purpose of this policy is to increase liquidity and reduce the risk of a speculative attack. (Cruz & Walters, June 2008).
International reserves can be improved by storing more and more international currencies, which can be done via three routes, increasing exports, remittances from abroad and the adoption of government grants or loans. If foreign exchange reserves are growing because of exports and remittances from then the reserve growth is positive, but is growing with the help of loans then growth will be negative. This research has nothing to do with positive or negative growth, this research examines only the bank's foreign exchange reserves Central and its impact on stock market capitalization.
Market Capitalization
Market capitalization represents the aggregate value of companies and securities. Is obtained by multiplying the number of shares outstanding by their current price per share, adding then all values, we obtain the aggregate market capitalization. For example, if XYZ company has 200,000 shares outstanding at a price per share of $ 25 per share after the market capitalization is 200,000 x $ 25 = $ 5,000,000. KSE market capitalization represents the total market value as a whole, of Thus by measuring the KSE-All-cap stocks in the market we can measure the overall performance of the Karachi Stock Exchange.
Objective
The purpose of this research is to understand the impact of Pakistan's foreign reserves in the KSE market capitalization on the basis of past conduct both variables together.
THE PROBLEM
The main objective of this study is to link the foreign exchange reserves Pakistan, with their stock markets to see a clear picture about them, because it affects many other variables.
Meaning
What this research is to provide the information necessary to guide the brokers, agents, planners, policy makers public to make decisions about the stocks and market material in Pakistan, especially on KSE observing the trend of foreign exchange reserves of Pakistan. The research also seek to add value for executives, managers, researchers and other students to learn foreign exchange reserves and securities markets of Pakistan.
Literature Review
The following are some studies related to this issue that has been done before by other researchers.
Hussain et al. (2009) analyzed the impact "of macroeconomics variables in stock prices: empirical evidence in the case of KSE" they consider quarterly data for various economic variables such as exchange rate, foreign exchange reserves, the industrial production index, any sale price index the gross fixed capital formation, and broad money M2, these variables are obtained from 1986-2008 period. The results show that after the reforms in 1991 the influence of foreign exchange reserve ratio significantly and the effects of other variables such as exchange times international investment position and GFCF are not significantly impact to stock prices. This result also shows that companies' internal factors such as increased production and capital formation while no significant effects that external factors such as exchange rate and reserve are significantly impacts stock prices.
Shaheen Nishat and analyze the equilibrium relationships along time between a set of macroeconomic variables and the Karachi Stock Exchange Index. The macroeconomic variables are represented by the industrial production index, the consumer price index, M1, and the value of an investment earning money market rate. They used vector error correction model to explore relationships such during 1973-2004. Their results show a "causal link" between the stock market and the economy and shows that industrial production is the major determinant positive stock prices in Pakistan, while inflation is a major determinant of negative stock prices in Pakistan. They found that macroeconomic variables-Granger caused the stock price, reverse causality was observed in the case of industrial production and stock prices. Moreover, we found that statistically significant lag between the length fluctuations in the stock market and changes in the real economy are relatively short (Nishat and Shaheen, 2004).
Bhattacharya et al. conduct a case study to analyze "causal relationship between the stock market and currency exchange, international reserves and the value of trade balance." We used the methodology of Granger causality, recently proposed by Toda and Yamamoto (1995) for the sample period April 1990-March 2001. In this study, Market BSE Sensitive Index is used as reference for the Indian stock market. The three important macroeconomic variables included in the study are the real exchange rate cash, foreign exchange reserves and trade balance. The analysis reveals interesting results in the context of Indian stock market, particularly with respect to exchange rate foreign exchange reserves and trade balance. The results suggest that there is no causal link between stock price and the three variables considered (Bhattacharya and Mukherjee, 2001).
Dimitrova analyzed the relationship between stock prices and exchange rates using the multivariate model. He focuses on stock markets U.S. and the UK during the period January 1990 to August 2004. This study developed the hypothesis that there is a link between currency markets and securities. The researcher said that the relationship is positive when stock prices are variable and probably negative lead when rates of change are the main variable (Dimitrova, August 2005).
Sohail et al. conducted a research on the LSE, the intent of this study was to examine long-term and short term relationships Lahore stock exchange and macroeconomic variables in Pakistan. Monthly data from December 2002 to June 2008 was used in this study. The results revealed that there was a negative impact of consumer price index on stock returns, while the industrial production index, real effective exchange rate, supply money had a significant positive effect on stock returns in the long term (and Sohail Hussain, winter 2009).
Robert Gay made study to investigate the time series relationship between the prices of market indexes and macroeconomic variables in the exchange rate and oil prices in Brazil, Russia, India and China (BRIC) using the model of Box-Jenkins ARIMA. But no significant relationship was found between the corresponding exchange rate and oil prices in the index market prices of securities of both BRIC countries and also there was no significant relationship between past market values and returns today (Gay, March 2008).
Data and Methodology explanation
Dependent Variable
KSE capitalization market is dependent variable in this study and simply collected from the economic surveys of Pakistan and the reports of the State Bank of Pakistan in late fourth fiscal year 2001-2009.
Independent Variable
A foreign exchange reserves of Pakistan is an independent variable in this investigation and calculated by the following equation.
R = Fc + + SDR + TLR Nostro
Where:
R = foreign exchange reserves
SDR = special drawing rights held by PAS
Fc = foreign currency held by PAS
PAS = Nostro accounts abroad in foreign currency.
TLR = Total liquid reserves
Methodology
To examine the relationship between foreign exchange reserves and market capitalization KSE following the simple linear regression model has been tested.
Y = X1 + + β1 β0 €
Where:
R: Y = capitalization KSE stock in billions.
β0 = intersection
β1 = Slope of line
X1 = Foreign Exchange Reserves in millions U.S. dollars
€ = Error variable
Model Summary
Model RR Square R Square set std. Estimation error
1 .680 .463 .440 903.87372
Anova
Sum Model square half square df Sig F.
Regression 1 1.687E7 1.687E7 20 651 0000
Residual 816987.693 1.961E7 24
Total 25 3.648E7
Note into account. Data are adapted from "SPSS software production"
After the test results show that the coefficient correlation (R) is equal to 0.680 showing that there is positive (nonsignificant positive) relationship between market capitalization and reserves, and who looks in the following chart.
This graph shows that an increase in foreign exchange reserves takes into account the market capitalization KSE but not much.
The results show that the coefficient of determination (R2) is equal to 0.463 showing that 46.3% of the variation in KSE market capitalization is due to the variation in foreign exchange reserves. The remaining 53.7% is unexplained. The Anova table value is significant (0.000) that shows that the model is good overall fit.
The value of the regression constant or intercept -1,227.56 is the average market capitalization without independent variable. This shows that the average market capitalization is negative (below the line of axis X) with the value of 1.22756 trillion Rs. when foreign reserves currency are equal to zero.
The regression coefficient or slope is equal to 0.303 showing that the KSE market capitalization will increase in Rs 0.303 billion. to an increase of $ million increase in foreign exchange reserves of Pakistan.
Conclusion
The results of this study show that there is positive (not significant) relationship between foreign exchange reserves and market capitalization of KSE. The results show that 46.3% of the variation in the KSE market capitalization is due to the variation in foreign exchange reserves. The results of this study are also consistent with the results of other researchers as Suliaman et al. study the behavior to measure the impact of macroeconomic variables on stock prices and write no relationship positive correlation between foreign exchange reserves and stock prices in Pakistan. In other countries there are different results as in India there is a relationship between these variables as shown by a researcher, but this study shows the reality on the stock market in Pakistan.
References
Bhattacharya, B., and Mukherjee, J. (2001). Causal relationship between stock market and exchange rate, foreign exchange reserves and the value of the trade balance: A case study for India.
Bloomsbury Information Ltd. (2009). Dictionary. Retrieved February 18, 2010, Q Finance: http://www.qfinance.com/dictionary/foreign-currency-reserves
Cruz, M., & Walters, B. (June 2008). Is Acculmulation of International Reserves Good for Development. Cambridge Journal of Economics.
Dimitrova, D. (August 2005). The relationship between exchange rates and stock prices – in the model studied model. Issues in Economics Politics, 14.
Elizabeth. (2006). The Oxford Dictionary of Phrase and Fable. Retrieved February 10, 2010, the Encyclopedia: http://www.encyclopedia.com/doc/1O214-StockExchange.html
Free. (2009). The Oxford Pocket Dictionary of Current English. Retrieved February 14, 2010, the Encyclopedia website: http://www.encyclopedia.com/doc/1O999-foreignexchange.html
Gay, RD (March 2008). Effect of macroeconomic variables in the Stock Exchange Rturns four emerging economies – Brazil, Russia, India and China. Business And International Economics Research Journal, 7.
Gulf News. (2008). Investments. Retrieved March 15, 2010, from gulfnews website: http://gulfnews.com/business/investment/pakistan-emerges-a-market-winner-1.97437
Hussain, DI (2009). Why have Pakistna ato accumulate foreign reserves?
Karachi Stock Exchange Limited warranty. (2009). Introduction. Retrieved February 2010, a website Kararchi Stock Exchange: http://www.kse.com.pk/aboutus/introduction.php?id=7&sid=7.01
Karachi Stock Exchange. (2009). Introduction. Retrieved February 2009, Kararchi Stock Exchange website: http://www.kse.com.pk
Islamabad Ministry of Finance, Government of Pakistan. (Nd). Market Capital. Economic Survey of Pakistan. Islamabad, Pakistan: Government of Pakistan.
Mohammad, SD Hussain, A., and Ali, A. (2009). Impact of macroeconomic variables on stock price – if empirical Evidance KSE. European Journal of Scientific Research, 38 no. 1 96-103.
Nishat, DM, Shaheen, R. (2004). Macroeconomic factors and stock market in Pakistan.
Reilly, FK, and Brown, KC (September 2005). Investment Analysis and Portfolio Management (Eitghth ed.).
Sohail, N., and Hussain, Z. (Winter 2009). In the long and short-term Relationship between macroeconomic variables and stock prices in Pakistan – The case of the Lahore Stock Exchange. Pakistan Economic and Social Review, 47, 183-198.
SPSS. (2007, September 13). Regression analysis.
State Bank of Pakistan. (2010, January). The foreign exchange reserves. Lahore, Pakistan: State Bank of Pakistan.
About the Author
Shabbir Hussain, student of M.Phil at University of Central Punjab, Lahore, Pakistan
SHAME ON YOU: Rep. Speier To You Mr. Sullivan,. Chairman Waxman’s Eric R. Dinallo, Superintendent, NY State Insurance Dept, Lynn E. Turner, chief accountant, Securities Exchange Commission Robert B. Willumstad, CEO, Martin J. Sullivan, CEO, AIG
