i

ECONOMY AND ITS IMPACT

ON STOCK MARKET;
AN EMPIRICAL EVIDENCE FROM NEPSE

By:
Arjun Mahat
PU Registration No: 128-2-3-00190-2015
Novel Academy

A thesis submitted to the

Purbanchal University, Faculty of Management
In Partial Fulfillment of the Requirement for the Degree of
Master of Business Administration (MBA)

August, 2017
New Road, Pokhara-08
 DECLARATION

I hereby declare that the report entitled “Economy and its impact on stock market: an
empirical evidence from NEPSE” is a result of my own study/observation carried out
in the year 2017. I assert that the statements made and conclusions/drawn are an
outcome of my observation and briefing received during the research period. I further
declare that to the best of my knowledge and belief, the report does not contain any
part of any work which has been submitted to any other University or Institute or
published earlier.

Date: 2017-09-25
…………………………

Arjun Mahat

PU Reg. No. 128-2-3-00190-2015

Novel Academy, Pokhara

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 CERTIFICATE OF SUPERVISOR

This is to certify that the thesis entitled “Economy and its impact on stock market:
an empirical evidence from NEPSE” submitted by Arjun Mahat, PU Reg. No.
128-2-3-00190-2015 to the Faculty of Management, Purbanchal University, in partial
fulfillment for the award of the degree of MBA is a original research work carried out
by him/her under my supervision. As far my knowledge, the contents of this thesis, in
full or in parts, have not been submitted to any other Institution or University for the
award of any degree or for any commercial purpose.

…..……………………………..

Dr. Krishna Raj Bhandari PhD

Principal, Novel Academy
MBA, AIT, Thailand
PhD, University of Vaasa, Finland
Date: 2017-09-25

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 VIVA-VOCE SHEET

We have conducted the viva-voce examination of the thesis entitled “Economy and
its impact on stock market: an empirical evidence from NEPSE” submitted by
Arjun Mahat, PU Reg. No. 128-2-3-00190-2015and found this thesis to be original
work of the student and written according to the presented format. We recommend the
thesis to be accepted as partial fulfillment of the requirement of the degree of MBA.

Viva-Voce Committee

………………………. …..………………………….
Mr. Bisheswor Acharya Dr. Krishna Raj Bhandari PhD
CEO, Novel Academy Principal, Novel Academy
MBA, AIT, Thailand
PhD, University of Vaasa, Finland
(Thesis Supervisor)

……………………………….
Prof. Dr. Puspa Raj Sharma
(External Expert)

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 ACKNOWLEDGEMENT

This thesis report has been prepared for the partial fulfillment of the degree of Master
of Business Administration (MBA) under the faculty of management, Purbanchal
University (PU), Nepal. This report attempts to study the determinants of stock price
in context of Nepal by studying commercial banks of Nepal.

In this course, many individuals have contributed their valuable time, suggestions, and
efforts. So I cannot remain isolated without acknowledging them. First of all, I would
like to express my first and foremost gratitude to my supervisor Dr. Krishna Raj
Bhandari for kind support, encouragement, guidance and supervision in helping me
carryout this study to its completion.

Similarly, I would like to extend my sincere gratitude to Novel Academy for

providing me an opportunity to conduct thesis report on my interested topic which
helped me gain much more insight about stock market of Nepal. I equally
acknowledge my sincere gratitude to MBA Coordinator of Novel Academy, Faculty
members of Department of Management, Novel Academy, New Road, Pokhara for
their help and cooperation during the course of the study.

Finally, my gratefulness is for my beloved teachers, for their greatest love and
support. And the last expressions of my gratitude is to my family, friends for their
continuous encouragement in every situation and bringing me to this point.

Arjun Mahat

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 TABLE OF CONTENTS

DECLARATION............................................................................................................i
CERTIFICATE OF SUPERVISOR..............................................................................ii
VIVA-VOCE SHEET...................................................................................................iii
ACKNOWLEDGEMENT............................................................................................iv
LIST OF TABLES......................................................................................................viii
LIST OF FIGURES......................................................................................................ix
ABBREVIATIONS........................................................................................................x
ABSTRACT..................................................................................................................xi
CHAPTER I...................................................................................................................1
INTRODUCTION..........................................................................................................1
1.1 Background of the study.......................................................................................1
1.2 Statement of Problem...........................................................................................3
1.3 Research Questions..............................................................................................4
1.4 Significance of study............................................................................................4
1.5 Objective of the Study..........................................................................................5
1.6 Definition of Terms..............................................................................................5
1.6.1 NEPSE Index.................................................................................................5
1.6.2 Gross Domestic Product (GDP).....................................................................6
1.6.3 Inflation..........................................................................................................6
1.6.4 Interest rate....................................................................................................7
1.6.5 Unemployment rate........................................................................................7
1.6.6 Remittance.....................................................................................................8
1.6.7 Market Capitalization....................................................................................8
1.6.8 Number of listed companies in NEPSE.........................................................8
1.6.9 Paid-up value.................................................................................................8
1.6.10 Annual Turnover..........................................................................................9
1.7 Limitations of the Study.......................................................................................9
1.8 Organization of the Study.....................................................................................9
CHAPTER II................................................................................................................11
LITERATURE REVIEW.............................................................................................11
2.1 Introduction......................................................................................................11

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 2.1.1 Review of Securities Market...........................................................................11
2.2 Reviews from International Context...................................................................13
2.3 Review of major studies.....................................................................................15
2.4 Review of Nepalese studies................................................................................19
2.4.1 Summary of Literature Reviews..................................................................23
2.5. Research Gap.....................................................................................................24
2.6 Review of NEPSE Index....................................................................................24
2.7 Review of GDP...................................................................................................26
2.8 Review of Inflation.............................................................................................27
2.9 Review of Interest rate........................................................................................27
2.10 Review of Unemployment rate.........................................................................28
2.11 Review of Remittance......................................................................................29
2.12 Hypothesis........................................................................................................29
2.13 Conceptual Framework....................................................................................30
CHAPTER III...............................................................................................................31
RESEARCH METHODOLOGY.................................................................................31
3.1 Research Design.................................................................................................31
3.2 Instrumentation...................................................................................................32
3.3 Description of method of analysis......................................................................32
3.3.1 Descriptive Statistics....................................................................................32
3.3.2 Correlation analysis.....................................................................................32
3.3.3 Regression analysis......................................................................................32
3.4 Population and Sample.......................................................................................33
3.5 Model..................................................................................................................33
3.6 Sources of Data...................................................................................................33
3.7 Data Collection Techniques...............................................................................34
3.8 Analysis of Data.................................................................................................34
3.9 Data Analysis Variable.......................................................................................34
CHAPTER IV..............................................................................................................35
OBSERVATION AND ANALYSIS...........................................................................35
4.1. Introduction.......................................................................................................35
4.2. Presentation and Analysis of Secondary Data...................................................35
4.2.1 Analysis of NEPSE Index............................................................................35

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 4.2.2 Analysis of GDP..........................................................................................37
4.2.3 Analysis of Interest Rate..............................................................................39
4.2.4 Analysis of Inflation Rate............................................................................41
4.2.5 Analysis of Unemployment Rate.................................................................42
4.2.6 Analysis of Remittance................................................................................44
4.3 Descriptive Statistics..........................................................................................46
4.4 Correlation analysis............................................................................................47
4.5 Regression analysis............................................................................................48
4.5.1 Interpretation of R........................................................................................49
4.5.2 Interpretation of adjusted R square..............................................................49
4.5.3 Interpretation of P-Value.............................................................................49
4.5.4 Regression results and testing of hypothesis...............................................49
RESULTS AND DISCUSSION..................................................................................54
5.1 Summary of the results.......................................................................................54
5.2 Discussion...........................................................................................................56
CHAPTER VI..............................................................................................................59
FINDINGS, CONCLUSION AND RECOMMENDATION......................................59
6.1 Summary of Findings.........................................................................................59
6.2 Conclusion..........................................................................................................62
6.3 Recommendations..............................................................................................63
6.4 Scope for Further Study......................................................................................64
REFERENCES.............................................................................................................65

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 LIST OF TABLES

Table 4.1 NEPSE Index from FY 1993/94 to 2015/16……………………………..37

Table 4.2 GDP movement form FY 1993/94 to 2015/16…………………………...39

Table 4.3 Annual Avg. Interest rate from FY 1993/94 to 2015/16…………………40

Table 4.4 Annual Avg. Inflation rate from FY 1993/94 to 2015/16………………. 42

Table 4.5 Annual Avg. Unemployment rate from FY 1993/94 to 2015/16……….. 44

Table 4.6 Annual Inward Remittances from FY 1993/94 to 2015/16…………… ...45

Table 4.7 Descriptive Statistics…………………………………………………….47

Table 4.8 Correlation between Dependent and Independent Variables…………… 49

Table 4.9 Regression Analysis between Dependent and Independent Variables…. 52

Table 5.1 Summary of Results……………………………………………………...54

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 LIST OF FIGURES

Fig 2.1 Conceptual Framework……………………………………………………30

Fig 4.1 NEPSE Index from FY 1993/94 to 2015/16…………………………….. 38

Fig 4.2 GDP Value from FY 1993/94 to 2015/16……………………………….. 40

Fig 4.3 Annual Avg. Interest rate from FY 1993/94 to 2015/16………………… 41

Fig 4.4 Annual Avg. Inflation rate from FY 1993/94 to 2015/16……………….. 43

Fig 4.5 Annual Avg. Unemployment rate from FY 1993/94 to 2015/16…………44

Fig 4.6 Annual Inward Remittances from FY 1993/94 to 2015/16……………… 46

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 ABBREVIATIONS

AGM: Annual General Meeting

APR: Annual Percentage Rate
APT: Arbitrage Pricing Theory
BFI: Bank and Financial Institution
CDS: Central Depository of Securities
CRO: Company Registrar Office
DPS: Dividend per Share
EPS: Earning Per Share
FPO: Further Public Offering
FY: Fiscal Year
GOV: Government
GDP: Gross Domestic Product
IPO: Initial Public Offering
MOF: Ministry of Finance
NEPSE: Nepal Stock Exchange
NRB: Nepal Rastra Bank
NASDAQ: National Association of Securities Dealers Automated Quotation
OTC: Over the Counter
SEBON: Securities Board of Nepal
SEC: Securities Exchange Centre
TU: Tribhuvan University

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 ABSTRACT
This research was conducted to know the relationship between economic variables
and stock market. The major economic variables used in this study are GDP, Interest
rate, Inflation rate, Unemployment rate and Remittance. Thus, this study examines the
impact of macroeconomic variables on stock price in Nepalese capital market for the
period of 1993/94 to 2015/16, using Correlation and Simple regression models and
developing NEPSE Index as an indicator of stock market development. Graphical
analysis, descriptive statistics, correlation analysis and regression analysis are
employed to analyze the data with the help of Microsoft Software and SPSS package.
The finding suggests that economic growth and Capital (Stock) market development
in Nepal are correlated to each other. 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. Using correlation, it has
been found that stock market i.e. NEPSE Index has positively correlated with GDP,
Inflation rate and Remittance whereas; is negatively correlated with Interest rate and
Unemployment rate. Also, using linear regression model, it has been found that there
has been significant relationship of NEPSE Index with Interest rate and Remittance
whereas insignificant relationship with GDP, Inflation rate and Unemployment rate.
The result of GDP and NEPSE Index being insignificant has been found contradictory
comparing to international context because of the inefficient market condition in
Nepalese economy.

Key Words: NEPSE Index,

Economic Growth,
Market Capitalization,
Turnover,
GDP,
Inflation,
Interest rate,
Unemployment rate,
Remittance .i.e. Inward Remittance

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 CHAPTER I

INTRODUCTION

1.1 Background of the study

Economic growth of Nepal during the last five decades has not been very impressive
when compared with that of other neighboring countries. Within this period, Nepal
has gone through a number of transformations at political front. The liberalized
economic policy initiated in the 1980s continued in the decade of 90s after the
restoration of democracy. During this decade, the country implemented a number of
key liberal reforms like deregulation of trade, industry, finance, and foreign exchange
regimes; streamlining of price controls and subsidies; privatization of key public
enterprises; massive reductions in trade related tariffs; and policy related to industry
and foreign investment. However, political instability due to the frequent government
changes and Maoists insurgency after 1995 delayed implementation and completion
of some of the more difficult reforms, and hence weakened its economic growth.

Emerging stock markets are partially segmented from global capital markets.
Therefore, local factors rather than global factors should be the primary source of the
movement in stock returns in these markets. In the Nepali context, the Gross
Domestic Product (GDP) growth for last few years has hardly crossed 5%. In fiscal
year (FY) 2007-08, it was 6.1% and for the rest of the period it remained below 5%
whereas the inflation rate remained around 10% during the period (Nepal Rastra Bank
[NRB], 2012). Similarly, percentage increase in the Nepali export was negative in the
FYs 2006-07, 2007-08 and 2009-10 and was marginally positive in the rest of the
years. However, the increasing trend of import was in double digit percent with the
highest of 31.6% in FY 2009-10. On the other hand, Nepali financial market faced
extreme liquidity crisis during the period of FYs 2008-09 to 2011- 12 which pushed
the interest rate to the highest point. During the same period, indicators of capital
market showed high volatility.

Stock Market is affected by factors like changes of a country’s political and economic
conditions, behavioral reactions of large group of decision-makers and risk factors

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(Jafari, 2011). The factors that influence investors to place buy or sell order of the

stock is subjective part. Basically, the collective interpretation of the investors

towards the future prospects about company success, economic condition and many
other factors influence their trading behavior. Sellers sell the stocks predicting that
stock price will fall in the future and buyers buy the same stock thinking that stock
price will rise in the future. The contradict analysis between the investors meet at a
specified price to exchange stocks in secondary markets. The relationship between the
stock market and macroeconomic factors it has been discussed in studies (Chan, Chen
& Hseih, 1985; Chen, Roll & Rose, 1986; Ayadi, 1991; and Humpe & Macmillan,
2009) that deal with this topic. It is seen that the stock return is determined by a
number of fundamental macroeconomic variables such as interest rate (positive
relation by Mohammad, 2012; negative relation by Kandir, 2008), GDP (positive
relation by Ibrahim & Aziz, 2003) and with inflation rate (negative relation by
Nelson, 1976; Fama & Schwert, 1977; positive relation by Chen, 1986; DeFina,
1991).

Nepal Stock Exchange (NEPSE), a platform to exchange stocks and securities in

Nepal, was converted from Securities Exchange Center in 1993 under a program
initiated to reform capital markets with an objective of facilitating and promoting the
growth of capital markets. Securities Board of Nepal (SEBON), an apex regulator of
securities market, established on June 7, 1993. Twenty-three years has been passed
the establishment of capital market in Nepal, but capital market in Nepal is still in the
initial stage of development with low level of resource mobilization, low level of
turnover, and low level of impact on national economy (Adhikari, 2013). It has not
developed as desired rate due to lack of serious efforts in the implementation of plans,
policies and programs (Adhikari, 2013).

In this context, this study tries to analyze the impact of selected macroeconomic
variables i.e. GDP, inflation, interest rate, unemployment rate and remittance on stock
prices in Nepalese stock market using monthly from F/Y 1993/94 to 2015/16. The
main aim of this study is to examine the impact of selected macroeconomic variables
on NEPSE index.

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1.2 Statement of Problem
Development of capital market in general and stock market in particular is a must for
a sound industrial development of the country. Capital market institutions help to
mobilize the surplus unit into the deficit units for productive investments. As it
mobilize the scattered resources and channels them in productive sector. It is an
effective instrument of expanding productive capacities of the country. Due to the
lack of information and poor knowledge investors are manipulated or exploited by the
financial institutions or other market intermediaries such as extent that investing in
common stock is intolerably hazardous. Investor’s attitude and perception plays a
vital role in rational decision which is influenced by the knowledge and access to the
data required for the analysis. Most of Nepalese investor invests their fund in some
securities because of less knowledge about risk-return behaviors of the securities
(Adhikari, 2004).

Nepalese capital market is very small in comparison with other developed stock
markets. There are a few numbers of brokers, limited number of listed companies,
very few transactions and most importantly investors are unknown about the pros and
cons of the stock market. The market is almost totally captured by individual investors
who buy very little number of shares and therefore they do not bother analyzing the
data and information before buying and selling stock. The variety of securities
available in the market allows each investor to select asset that suit his risk,
preferences and beliefs. But there is lack of different types of securities in the stock
market (Manandhar, 2005).

The relationship between financial development and economic growth, with focus on
developmental role of stock markets, has been in debate for sometime in the past. In
Nepal, despite a history two decade of planned economic activities to develop real
sector of the country, little attention was paid to the development of financial sector.
Over the decades, financial sector, despite many problems has developed significantly
in Nepal. However, most of the developments were confined to the banking sector.
Stock market has mutually remained stalled because of the low priority in the
government’s financial reform policies. In developed countries, the decline in stock
market results major fall in economy but in Nepal, despite fall in stock market size
there might not be major effect in economy as whole. This is the major issue this
research paper tries to find.

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Nepal is encircled by and confronting with the problems of state of
underdevelopment, turbulent socio-political situation preventing economic growth,
and economic policy of globalization and liberalization, demanding global standards
of economic behavior. Inadequate capital availability and its ineffective use is the
crux of the problems of economic development. Stock market plays important role
both by making provision of capital and encouraging its effective use for economic
growth. Most of the countries of the world heavily depend on the stock market to
manage economic development of the country. Although relationship between stock
market development and economic growth has been almost unequivocally established
by various authors and studies, yet whether economic development of Nepal triggers
the development of stock market or the development of stock market augments the
development is not validated in Nepal. Paucity of research endeavors and materials in
the Nepalese context based on sound statistical tools is markedly felt by the
researchers, academicians and practitioners, which provide the ground to undertake
this study. So it remains an important and burning topic of study and discussion at
present. In the context, this study has been undertaken to assess the impact of
economy in Nepalese Stock Market. Hence, this study deals with following issues in
the context of Nepalese stock market:
(1) Is there any impact of GDP, Inflation, and Interest rate, Unemployment rate and
Remittance in the stock market?

1.3 Research Questions

These are some research questions which the researcher tried to answer and solve
through this research:
1. Is there any impact of GDP, Inflation, Interest rate Unemployment rate and
Remittance on the stock market?
2. What is the relationship between the development of the economy and
performance of stock market?

1.4 Significance of 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

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must be noted that economic growth is, took a great extent, dependent on the
industrialization in a country.
The findings of this study will be beneficial to investors, researchers, academicians,
macroeconomists and policy makers. The first beneficiaries of this study are the
corporate and individual stock market investors as they can be able to use the findings
of this study in making investment decisions and strategies. The findings of this study
would enable the investors to calculate more accurately solutions to problems of
optimal portfolio selection, and to efficiently monitor and manage financial risks.
In addition to the investors, the result of this study will be beneficial to policy makers
to draw and implement relevant policy regulations to improve stock market
conditions. This study also will serve as a research material for the researchers and
academicians.

1.5 Objective of the Study

The main objective of the research is to explain the relationship between stock market
and the economic variables of the Nepalese capital market. However, the specific
objectives are outlined below:
1. To find out the major economic variables affecting the stock market.
2. To determine relationship between economic variables likes Interest rate,
Inflation, GDP, Unemployment rate, Remittance etc with stock market in
Nepal.

1.6 Definition of Terms

This study has been done using secondary data where NEPSE Index is a major
dependent variable and other independent variables are Gross Domestic Product
(GDP), Inflation rate, Interest rate, Unemployment rate and Remittance. NEPSE
Index is supported by other terms as Market Capitalization, Number of listed
companies in NEPSE, Annual Turnover and their Paid-up value from fiscal year
1993/94 to 2014/15. Here are details of variables used in this study:

1.6.1 NEPSE Index

An index is a composite value of a portfolio of securities representing a particular
market or a portion of it. In this study, NEPSE index is taken an indicator of stock
prices in Nepalese stock market as it is the composite price of all listing companies.
Each index has its own calculation methodology and is usually expressed in terms of a

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change from a base value. Thus, the percentage change is more important than the
actual numeric value.
Index is one of the most important indicators of secondary market which is also
considered as barometer of country’s economy. NEPSE index is calculated on the
basis of value weighted method.For example, NEPSE Index in base year 1993/94 is
226.03 and in F/Y 2014/15 are 961.23. The formula of calculation of NEPSE index is
as follow:
NEPSE Index = Market Capitalization of all shares / Base market Capitalization *
100.

1.6.2 Gross Domestic Product (GDP)

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. Simply, GDP is a
broad measurement of a nation’s overall economic activity. Here, annual GDP in
million is taken from 23 years period as one of the major independent variable. For
example, highest GDP is 1977000 million rupees in F/Y 2014/15 whereas lowest is
366000 million rupees in base year 1993/94. Gross domestic product can be
calculated using the following formula:
GDP = C + G + I + NX
Where,
C is equal to all private consumption, or consumer spending, in a nation's economy, G
is the sum of government spending, I is the sum of all the country's investment,
including businesses capital expenditures and NX is the nation's total net exports,
calculated as total exports minus total imports (NX = Exports - Imports).

1.6.3 Inflation
Inflation can also be described as a decline in the real value of money, a loss of
purchasing power in the medium of exchange, which is also the monetary unit of
account. When the general price level rises, each unit of currency buys fewer goods
and services. A chief measure of price inflation is the rate, which is the percentage
change in a price index over time (Singh, Mehta & Barsha, 2011). Economic theory
indicates that inflation decreases the purchasing power of business cash flow. The

6
inflation rate would differ from county to country as the nature of the country’s
economy. Similarly, its impact on stock prices would also different in capital markets.
So, this study includes inflation by the means of change in Consumer Price Index
(CPI) to provide an insight about its possible effect upon the stock prices from the
prospective of an emerging market.
Thus, it has been taken to examine its impact on stock prices in Nepalese stock
market. For example, Inflation rate in F/Y 2009/10 is 12.622 percentages and 2.435
percentages in F/Y 2001/02.

1.6.4 Interest rate

The amount charged, expressed as a percentage of principal, by a lender to a borrower
for the use of assets is called interest rate. Essentially, interest is nothing more than
the cost someone pays for the use of someone else’s money.
Interest rate used in this research paper is inter-bank borrowing rate which was
published in current macroeconomic situation by NRB. When there is less money
supply or crisis of liquidity, the bank started to borrow money from another bank for
short period and the lender bank will charge some interest rate. The inter-bank interest
rate is determined as availability of money in the market. If there is crisis of liquidity
in the market, all banks face the liquidity crisis as result they increase interest rate on
deposit. In this situation if a bank needs to borrow money from another bank, the
lender banks definitely charged high interest rate as they have been paying high
interest rate on deposit. So, inter-bank interest rate is controlled by market activities
and availability of supplied money in the market. Thus, it is the one of the main
macroeconomic variables which has been taken to examine its impact on stock prices
in Nepalese stock market. In this study, average interest rate has been used from 23
years period. For example, Interest rate in F/Y 2007/08 is 5.25 percentages whereas it
is 11 percentages in F/Y 1993/94 and 1995/96.

1.6.5 Unemployment rate

It is defined as the percentage of the total labor force that is unemployed but actively
seeking employment and willing to work. In this research, how the employed and
unemployed forces of Nepal contribute to stock market is done.

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1.6.6 Remittance
Remittance refers to that portion of migrants’ earnings sent from the migration
destination to the place of origin. Even though they can also be sent in kind, the term
‘remittances’ is normally limited to denote monetary and other cash transfers
transmitted by migrant workers to their families and communities.

Remittance plays an important role in enhancing disposable income in home country.

In Nepal, total remittances contribute 29.6% in the fiscal year 2015/16. Although
Nepal has trade deficit, BOP has recorded a significant level of surplus in this fiscal
year. The general impression of several observers is that the remittances in the
current form are underutilized in Nepal. Primarily, this is because the major share
of these inflows is used for the purpose of daily consumption, rather than savings,
education, or investment.

Thus, this study has taken annual remittance inflow as factor to impact the stock
prices in Nepalese stock market.

1.6.7 Market Capitalization

Market capitalization is market value of a company's outstanding shares. This figure
is found by taking the stock price and multiplying it by the total number of shares
outstanding. Here, market capitalization is used from 23 years period to support
NEPSE Index where market capitalization in the base year is 13872 million rupees
and highest in F/Y 2013/14 i.e. 1057165.83 million rupees. This is the sector wise
contribution in market capitalization but here annual data is used.

1.6.8 Number of listed companies in NEPSE

Number of listed companies in NEPSE is the institutions doing their transaction in
Nepal Stock Exchange. Higher the number better will be NEPSE Index resulting
better contribution in economy. The highest number of listed companies in NEPSE
was 235 in F/Y 2013/14 and lowest was 66 in base year.

1.6.9 Paid-up value

Paid-up value is the amount of money a company has received from shareholders in
exchange for shares of stock. In this study, paid-up value is in increasing order from
base year to F/Y 2015/16. For example: Paid-up value in base year is 2182.2 million
rupees and 210590 million rupees in F/Y 2014/15.

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1.6.10 Annual Turnover
Annual turnover in NEPSE is the total buy and sales of shares in annually. Annual
turnover noted highest in F/Y 2013/14 i.e. 77290 million rupees.

1.7 Limitations of the Study

There are many macroeconomic variables that affect stock market. Other important
macroeconomic indicators such as Money supply, Balance of Payment and monetary
policies are not included because of the unavailability of adequate data. The stock
price will be affect by other many factors like firm size, liquidity, management styles,
profitability, dividend pay-out ratio and many other factors. However, this study is
limited to the five macroeconomic variables that are GDP, Inflation, Interest rate,
Unemployment rate and Remittance.

Nepalese capital market is still in the initial stage of development with low level of
resource mobilization, low level of turnover, and low level of impact on national
economy as stated earlier (Adhikari, 2013). Thus, the finding of this study may not
applicable in Nepalese capital market since Nepalese capital market is dominated by
banking and financial institutions (BFIs). A little change in this sector would great
impact in NEPSE Index. Also, the data used are basically secondary in nature and
fully based on the student’s limited financial resources within a limited time frame.

1.8 Organization of the Study

This Study has to be completed within the six chapters, which are as follows:
Chapter One: It includes the Introduction, Statement of Problem, objective of the
study, Research Questions, Significance of the study etc.
Chapter Two: This Chapter includes review of literature. The researcher has divided
this chapter in two portions, first being theoretical framework and second is review of
previous studies.
Chapter Three: The chapter three includes methodology covering research design,
nature and sources of data, data analysis process, models used for data analysis.
Chapter Four: This chapter is concerned with the observation and analysis of data.
Various statistical presentations are used for analyzing the collected data from different
sources. Actual sources result is obtained after analysis of data by using financial and
statistical tools and techniques. Major findings are drawn after analysis of data.

9
Chapter Five: This chapter focuses on the result and discussion part of the data. There
would be summary of the result and discussion regarding the result.
Chapter Six: This is the last chapter of study and includes Summary, Limitation of
Study, Conclusions and Recommendation for future research.

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 CHAPTER II

LITERATURE REVIEW

In this chapter, an attempt is made to review some of the literatures concerning the
stock market in Nepal. Review of topic “Economy and its Impact on Stock market;
An Empirical Evidence from NEPSE” is enlightened here. Various books, journals
articles and some previous research work related to this topic and many indirect topics
are reviewed in the context of Nepalese stock market as well as international stock
market. Also, conceptual framework is linked to review from different scholars.

2.1 Introduction
A stock market is a market for trading of publicly held company stock and associated
financial instruments. Originally, stock markets were “open outcry”, where trading
occurring on the floor of a stock exchange. Most modern stock trading is done in
electronic exchanges where buying and selling occurs via online matching of order
placed buyers and sellers (Manandhar, 2005).

The act of raising funds by issuing shares to the general public in Nepal started in
1937. Though, the development of securities markets could not be a national policy
for a long time, the then industrial policy of Nepal led to institutional development of
securities markets with the establishment of securities Exchange Centre in 1976.
Securities Exchange Centre used to manage and operate primary and secondary
markets of long term government securities and corporate securities. After some years
of establishment policies and programs were made to develop and promote stock
exchange, issue manager, underwriter, securities dealer, stock broker and portfolio
manager in the markets with the objective of avoiding possible conflict of interest
between various market participants (Adhikari, 2004).

2.1.1 Review of Securities Market

Security market sets a price for the securities it trades and makes it easy for people to
trade them. Securities market facilities the sale and resale of transferable securities.
The security market can be defined as a mechanism for bringing together buyer and
sellers of financial assets to facilitate trading. Securities market is classified into two;

11
the market in which new securities are sold is called the primary market and the

12
market in which existing securities are resold is called the secondary market.
Secondary markets are created by brokers, dealers and market makers. Brokers bring
buyer and seller together with themselves actually buying or selling; dealers set price
at which they themselves are ready to buy and sell (bid and ask price respectively).
Broker and dealer come together organized market or in stock exchange (Gitman,
1992).

Securities are traded in a market called securities markets. Although, securities

markets are concerned in few locations, they refer more to mechanism, rather than to
place, designed to facilitate the exchange of securities by bringing buyers and sellers
of securities together. In other words, people and organizations wanting to borrow
money are brought together with those having surplus funds in the securities markets.
Securities, such as equities, short and long term debt instruments, derivatives etc are
the products that are traded in the markets, institutions such as investment bankers and
security firms, securities issuing institutions such as government and corporate bodies
and the participants of the securities markets. Securities markets major function is to
provide line between saving and investment thereby facilitating the creation of new
wealth. It consists of following types:

I) Primary Market
Securities available for the first time are offered through the primary market. The
primary markets are media through which new financial assets issued or generated.
Primary markets are facilitated by underwriting consisting of investment banks that
set a beginning price range for a given security and oversee its sale to investors. Once
the initial sale is complete, further trading is conducted on the secondary market,
where many transactions are done daily from Sunday to Thursday.

II) Secondary Market

In Nepal, the secondary market is very thin because of limited distributors of the
securities. NEPSE is established in order to promote the market used to support the
market even involving itself buying and selling activities if necessary. The advantage
of secondary market is to provide cash and investment opportunities to investor and to
make certain assets more attractive to buyers and sellers. Secondary market comprises
the stock exchange, the over- the –counter market. If secondary market did not exist,
the investors would have no place to sell their assets. In conclusion, secondary market

13
is a place where once securities purchased and sold to provide liquidity to the
government securities and the market is operated by the securities exchange center. It
is a market where existing securities are traded on daily and continuous basis. It is the
market for existing securities. This consists of exchanges and over-the counter
markets where securities are bought and sold after their issuance in the primary
market (Mishkin & Eakins, 2006).

III) Third Market

More generally, the term “third market” now refers to the trading of any exchange
listed security in the over the counter markets. The trading hours are not fixed to the
third market like organized stock exchange and continue to trade securities even when
trading is halted on an exchange. In the third market dealers provide only execution
and record keeping services for their clients.

IV) Fourth Market

The fourth market also exists in the over the counter market and here trades occur
directly among investors. In other words, in this type of market the buyer and seller
deal directly with each other. The organizer collects only a small commission or an
annual retainer for having to arrange block transactions. Thus, the costs of trading
blocks are very small.

For relating conceptual framework according to reviews from major studies, national
and international studies, this chapter has been divided into three major topics as:
2.2 Review from International context
2.3 Review of major studies
2.4 Review of Nepalese studies

2.2 Reviews from International Context

Vast numbers of research studies have been performed internationally on the stock
market. The findings of some of the research studies are as follows:
Ilahi, Ali, and Jamil (2015) investigate the linkage between macroeconomic variables
(inflation rate, exchange rate and interest rate) on stock market returns in Pakistan.
They used secondary data period of January 2007 to December 2012 to find the
linkage between selected macroeconomic variables and Karachi stock exchange 100
index as a proxy to represent the stock market returns. A Multiple Linear Regression
was performed for the purpose of data analysis and the study showed that there is

14
weak connection between macroeconomic variables and stock market returns.

Attari, Irfan and Safdar (2013) analyzed relationship between macroeconomic

volatility and stock market volatility by applying Exponential Generalized
Autoregressive Conditional Heteroskedasticity (EGARCH). They took interest rate,
inflation, and gross domestic product as macroeconomic variables and stock market,
Karachi Stock Exchange (KSE-100 Index) as test market. The monthly data has been
used the period of December 1991 to August 2012. They found that macroeconomic
variables have substantial influence on the stock prices. The stock prices have much
impact on the economy of the country, and are consider as the best indicators for
future prediction of the market and economy as well.
Ilahi, Ali, and Jamil (2015) studied the causal relationship among KSE 100 index and
interest rate, exchange rate, consumer price index, imports and exports. This study
had been conducted by applying techniques of Augmented Dickey-Fuller test,
regression analysis and Granger Causality test to examine the causal relationship of
selected macroeconomic variables with KSE 100 index using data of nineteen years
collected from 1992 to 2010. Results of regression analysis indicate the presence of
strong positive relation between IMP and KSEI. Furthermore, interest rate, exchange
rate, consumer price index and exports have no relationship with KSE 100. Results of
Granger Causality test demonstrate that bi-directional relationship exists between
interest rate and KSE 100 index. Exchange rate and imports have uni-directional
relationship with KSE 100 index and no causal relationship exists between consumer
price index, exports and KSE 100 index.
Menike (2006) studied the effect of macroeconomic variables on stock prices in
emerging Sri Lankan stock market using monthly data for the period between
September 1991 and December 2002. Multivariate regression on all variables for each
individual stock has been used to analyze the data. The study found that the
relationship has been exists between macroeconomic variables and stock price in the
Colombo Stock Exchange (CSE). In addition, Exchange rate, interest rate and
inflation rate respond negatively on stock price in Colombo Stock Exchange.
The indicators of an economy impact the stock market both positively as well as
negatively. It is important to predict the course of the national economy because
economic activity affects corporate profits, investor attitudes and expectations and
ultimately security prices. The key for the analyst is that overall economic activity

15
manifests itself in the behavior of stock price or the stock market. This linkage
between economic activity and the stock market is critical (Fisher &Jordan, 1990).
Levine (1996) studied about the relationship between stock market and economic
growth. It is found that stock market liquidity rather than stock market size and
volatility of the stock market matters for growth. He has shown that with taking
examples of 38 countries with more liquid stock markets in 1976 grew faster than
those economics with less liquid stock market in 1976 between 1976 and 1993. Thus,
stock market liquidity helps to forecast economic growth. He has used three measures
of stock market liquidity, viz. value traded ratio turn over and the value-traded ratio
divided by stock price volatility. The study has revealed that countries that had more
liquid stock markets in 1976 enjoyed both faster rates of capital formation and greater
productivity over the next 18 years, because liquid stock markets encourage more
investment (Levine, 1996).

2.3 Review of major studies

Levine (1991) found a positive relation between financial stock market and economic
growth by issuing new financial resources to the firms. Filer (1999) examined stock
market-growth nexus and exhibited positive casual correlation between stock market
development and economic activity. Spears (1991) reported that in the early stages of
development, financial intermediation induced economic growth. The financial stock
market facilitates higher investments and the allocation of capital, and indirectly the
economic growth. Sometimes investors avoid investing directly to the companies
because they cannot easily withdraw their money whenever they want. But through
the financial stock market, they can buy and sell stocks quickly with more
independence.

Levine and Zervos (1998) measured stock markets development along with different
magnitude and have suggested strong statistically significant relationship between
subsequent economic growth and stock market development. An efficient stock
market contributes to attract more investment by financing productive projects that
lead to economic growth, mobilize domestic savings, allocate capital proficiency,
reduce risk by diversifying, and facilitate exchange of goods and services (Mishkin
2001; & Caporale et al, 2004). Stock market liquidity is still a reliable indicator of
future long-term growth (Levine, 1996). Wachtel (2002), Trabelsi (2002) and Rioja
and Valev (2003) have shown empirically that the financial system has a significant

16
role and provides an important contribution to economic growth. Many other
researchers argue that there is a positive correlation between financial development
and economic growth (Pagano, 1993). They found that financial development is an
important determinant of future economic growth of a country. Atje and Jovanovic
(1993) found also a significant impact of the level of stock market development and
bank development.

Rajan and Zingales (1998) argued that stock market size is correlated to growth of
financial dependent firms. Levine (1997) and Bencivenga (1996) believe that more
liquid markets can create long-term investment and hence economic growth through
lower transaction cost. Similarly, Atje and Jovanic (1993) concluded that stock
markets have long-run impacts on economic growth. Paudel (2005) states that stock
markets, due to their liquidity, enable firms to acquire much needed capital quickly,
hence facilitating capital allocation, investment and growth. Luintel and Khan (1999)
found also bi-directional causality relationship between financial development and
economic growth in the sample of 10 countries. This relationship between growth and
financial system size is further supported by more recent evidence from the (World
Bank, 1989).

Further, Levine and Zervos (1998) found strong statistically significant relationship
between stock market development and economic growth. The result of Filer (1999)
studies show that there is positive causal correlation between stock market
development and economic activity. Rajan and Zingales (1998) argued also that stock
market size is correlated to growth of financial dependent firms so that stock markets
can give a big boost to economic growth (Levine, 1996; Garcia and Liu, 1999).
Mauro (2000) concluded that stock market is a stable predetermining factor of
economic growth in emerging economies.

Singh, Mehta and Barsha (2011) examined the casual relationship between index
returns and certain crucial macroeconomic variables namely employment rate,
exchange rate, GDP, Inflation and money supply in Taiwan. The analysis was based
on stock portfolios rather than single stocks. In portfolio construction, four criteria
were used: market capitalization, price earnings ratio, pay back ratio and yield. The
purpose was to make a finer point with respect to the relationship between economic
growth and stock market especially in terms of stock prices. Empirical findings
revealed that exchange rate and GDP affected returns of all portfolios, while inflation

17
rate, exchange rate, and money supply were having negative relationship with returns
for portfolios of big and medium companies.

Maysami and Sim (2002) employed the error-correction modeling technique to

examine the relationship between macroeconomic variables and stock returns in Hong
Kong and Singapore through the employment of Hendry’s (1986) approach which
allowed making inferences to the short run relationship between macroeconomic
variables as well as the long run adjustment to equilibrium. They analyzed the
influence of interest rate, inflation, money supply, exchange rate and real activity,
along with a dummy variable to capture the impact of Asian financial crisis in 1997.
The result confirmed that the influence of macroeconomic variables on the stock
market indices in each of the six countries under study, though the type and
magnitude of the associations differed depending on the country’s financial structure.
Mayasami and Sim (2002) had found similar result in their study done in 2001 in
Malaysia, Thailand, Japan and Korea.

Mgammal (2012) investigated the result of numerous variables (GDP, exchange rate
and inflation rate) on stock prices. The study applied on two gulf countries; United
Arab Emirates (UAE) and Kingdom of Saudi Arabia (KSA) for the time from January
2008 to December 2009. They found that for short term, the GDP influence
negatively on stock market price index for United Arab Emirates while having no
relationship between them for Kingdom Saudi Arabia. The result of study in long
term shared that GDP influence positively on stock market price index for United
Arab Emirates.
Talla (2013) investigate the impact of changes in selected macroeconomic variables
on stock prices of the Stockholm Stock Exchange (OMXS30) using monthly data
between 1993 and 2012. He applied unit root test, Multivariate Regression Model,
Standard Ordinary Linear Square (OLS) method and Granger causality test to analyze
the data and based on estimated regression coefficients and t-statistics, it is found that
inflation and currency depreciation have a significant negative influence on stock
prices. In addition, interest rate is negatively related to stock price change, but it is not
significant in the model. On the other hand, unemployment rate is positively
associated to stock prices although not significant. No unidirectional Granger
Causality is found between stock prices and all the predictor variables under study
except one unidirectional causal relation from stock prices to inflation.

18
The Arbitrage Pricing Theory, introduced by Ross (1976), establishes the theoretical
framework to link stock returns with several variables which can influence the source
of income volatility (Rahman et al., 2009). Mukherjee and Naka (1995) showed that
economic variables influence stock market returns through their effects on future
dividends and discount rates. Most common variables are the rate of inflation, money
growth, interest rates, industrial production and exchange rates for explaining the
stock market movement. Macroeconomic variables and stock market price can be
linked theoretically through Arbitrage Pricing Theory (APT) where multiple risk
factors can explain asset returns (Ross, 1976). APT is risk-return equilibrium based
model. Chen, Roll and Ross (1986) examined the validity of APT in the US securities
market. They used the US macroeconomic variables as proxies for the underlying risk
factors driven stock returns. They discovered that several macroeconomic variables
are significant in explaining expected stock returns, particularly in industrial
production, changes in risk premium and twist in the yield curve.

Other than monetary variables mentioned above, the level of real economic activity is
the crucial factor in determining the stock market returns (Rahman et al., 2009). There
is a general consensus that an increase in economic activity causes stock market
returns to increase (Eita, 2012). The most popular measure of real economic activity
is the gross domestic product (GDP). Unfortunately, data on GDP is normally on
annual basis and only in some countries, it can be available on a quarterly frequency.
Some use industrial production index as another measure for real economic indicator
(Rashid, 2008 & Rahman et al., 2009).

In an attempt to study the relationship between Indian stock market and

macroeconomic indicators, Singh (2014) used explanatory variables industrial
production, GDP, money supply, interest rate, trade deficit, foreign institutional
investment, exchange rate, crude oil price and gold price to determine their causal
relationship with average monthly closing price of BSE 100 and CNX 100, using
Pearson correlation, multivariate stepwise regression and Granger causality. The
correlation result revealed positive association of BSE 100 index with GDP and
negative association with interest rate and gold price while CNX 100 showed negative
relationship with money supply, interest rate and gold price.

Mawla (2011), aimed to test the relationship between stock market liquidity indicators
and the economic growth represented by the growth rate of a group of Arab states

19
from 1994 to 2007.The model adopted for testing the relationship is the simple linear
regression model. It concluded that liquidity provided by stock market doesn't have
significant effect upon the economic growth of the sample countries.

Levine and Zervos (1996) examines whether there is a strong empirical association
between stock market development and long-run economic growth. The study used
pooled cross country time-series regression of forty-one countries from 1976 to 1993
to evaluate this association. The study toes the line of Demirgüç-Kunt and Levine
(1996) by conglomerating measures such as stock market size, liquidity, and
integration with world markets, into index of stock market development.The growth
rate of Gross Domestic Product (GDP) per capita was regressed on a variety of
variables designed to control for initial conditions, political stability, and investment
in human capital, and macroeconomic conditions; and then include the conglomerated
index of stock market development. The finding was that a strong correlation between
overall stock market development and long-run economic growth exist. This means
that the result is consistent with the theories that imply a positive relationship between
stock market development and economic growth.

2.4 Review of Nepalese studies

Bhattarai (1990) has carried out on the phenomena of share market in Nepal. In
which, he emphasized the historical background and the analysis of various financial
variables affecting the smooth operation of share market. This study was mainly
based on secondary data obtained from various sources. He has applied both financial
and statistical tools in the study. He found that out of 12 sample companies 2
companies were useful to cross over the average price-earnings ratio, as a result,
market price of shares were highly skewed. Moreover, there was mismatch between
calculated and quoted price. However, he concluded that the involvement of more and
more institutions as well as individual investors in capital market through broker’s
network raised the transaction volume. Rumors spread by brokers and create genuine
speculation. Fair plays of bulls and bears make market equilibrium resulting price
stabilization speculation on the trading of shares is encouraged. Thus, the market
starts to walk randomly reflecting true value of shares. Investors are facilitated by
providing alternatives to make diversified portfolio.

Bhatta (1997) conducted research on the growing and developing nature of stock

20
market in Nepal; the objectives of the research were as follows:
i. To analyze the trend of the Nepalese stock market.
ii. To diagnose and compare sector-wise financial status of the stocks in
Nepalese stock market.
iii. To analyze the market share prices of Nepalese stock market.
iv. To find out the impact of secondary on primary market and vice versa.
v. To recommend for the improvement of stock market in Nepal.

The main conclusion of his research was the stock market and economic activities
move in similar direction. They influence each other. The development of the former
is reflected in the latter. The stock market raises and mobilizes the invest-able
resources to finance the long-term large projects in the economy. The stock market,
therefore, can be regarded as a heart of economy. The investors are interested to
invest their resources in the shares of corporate sector through the stock market in the
Nepalese economy. It is necessary to develop the entrepreneurship and encourage the
entrepreneurs to start the productive venture as soon as possible. Management
capability of the entrepreneurs is a key for better performance of the firms.
Government should launch programs to enhance management capability of the
entrepreneurs, which may contribute to raise the return from the investment.
Development of the manufacturing sector is the backbone of an economy, which, in
turn, assists to foster banking, finance and insurance sectors. Unfortunately, the
manufacturing sector does not have a good performance in Nepalese economy.
Almost all firms in this sector have a sustained loss. The secondary aspect of the stock
market is not also functioning well in Nepal. There is almost no liquidity in the stock
market for shares except that of banking and some finance and insurance sector.
Although it has become late to take steps to overcome such problems, the stock
market has good prospect for the resource mobilization to finance the productive
enterprises in Nepalese economy.

Mahat (1981) “Capital Market, Financial Flows and Industrial Finance in Nepal” has
said, “There is absence of secondary market to ensure liquidity to the securities on
demand. Any attempt to stimulate investment in industrial sources would naturally
depend on the extent to which the securities are saleable in the market. Only the
existence of a Stock Exchange can enable the security holders to sell their securities
for cash and purchase alternate securities if they wish. In Nepal, in the absence of

21
such a stock market, an industrial security is an illiquid form of asset, even more
illiquid than the real estate for all practical purpose”. The investors are losing faith on
the performance of share market since companies are not providing timely and
adequate disclosure of information and the continuous violence of shareholders’ rights
by the company management. This is responsible for losing faith of general public to
buy and sell shares of such companies (Shrestha, 1980).

Joshi (2010) examines 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.

According to KC (2010), 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. However,
Index from NEPSE has a relation with economic variables and vice versa.

In its early start, share market proved highly optimistic within a period of six months
due to favorable conditions of political stability, economic liberalization, strong
commitment of better and prospective return by company management active role of
brokers and the market makers, relaxation of control on the operation of the stock
exchange by the concerned authorities and growing condition of the investors. There
has been a remarkable rise in NEPSE index. But, later on there has been a continuous
downtrend in share market due to frequent change in government, poor performance
of companies, unfair share market practices and loss of investors’ confidence in share
market. As a result of these unfavorable developments, share market entered an era of
worst bearish trend resulting from tremendous fall in NEPSE index. In order to revive
the downtrend in share market, various reformative measures are urgently necessary
to curb on unfair share market practices through the development of comprehensive
and transparent stock exchange guidelines by the concerned authorities. The existing

22
company management has to reorient its positive attitude towards investors and
shareholders by improving the quality of timely reporting and providing the expected
return to win the losing confidence of shareholders. Investors should be self-conscious
in the selection of brokers for trading in securities and organize themselves to be
active to protect their rights. All these will help in the revival of share market to make
it more active by attracting the investing public (Shrestha, 1980).

Shrestha (2000) had studied on “Growth and Prospect of Stock Market in Nepal”. He
tried to show the role of the capital market in Nepal which has been increasing as to
mobilize the saving of the nations and canalized them in to productive activities. But,
the major problems in the process of development are to increase the level of saving
and canalize those savings into investment, which leads to economic growth. Capital
market is playing a crucial role in the process of growth. In this way, the important of
capital market arises as to proper allocation of accumulated savings to various
economies. Objectives of the study were to identify the legal obstacles in the stock
market development and to analyze existing transaction system. After the analysis of
the study, He made the following recommendations:
1. The provision of Annual General Meeting (AGM) should be within four
months from the completion of each financial year.
2. Financial statement and annual reports of the company’s should be presented
to authority within the three months from the completion of each financial
year.
3. Stock market translation is depending on the demand and supply of security
for sell or buy.
4. Market moves are the important indirect factor for the stock market
translations. GDP, interest rate, rate of inflation, foreign exchange rate and
commodity price are the main movers of stock market. They affect the share
price of the companies in the market.
5. Government and investors should be conscious in these factors whereas so
many changes will be in these movers. Government should be more concerned
in decreasing of GDP, and increasing of interest rate, rate of inflation and
commodity price. Government should give attention to the foreign exchange
rate, which also change frequently in Nepalese capital market.

23
 6. Information is the one of the main elements of stock market development.
Every stock market transactions are depending in the information provided by
the companies. Therefore security board and stock exchange limited should be
in coordination in the information provided by the companies for stock market
development.
Stock market is known as secondary market in the other side of market segment under
capital market. It includes all transferable securities issued previously by corporate
bodies; such securities are also traded in the stock exchange. In order to take the
benefit from stock market the corporate bodies should have listed the security in the
stock exchange. Stock market covers activities pertaining to the dealing in securities,
whether good or bad, for the liquidity and marketability. Only the securities of
existing companies are tradable on the stock exchange irrespective of issuer’s
corporate bodies or government (Shrestha, 2007).

In 1993, Securities Board of Nepal (SEBON), supreme body to regulate stock market
was established with the objectives to regulate, supervise and monitor the security
market. Similarly, the Securities Exchange Centre (SEC) was converted into Nepal
Stock Exchange Limited (NEPSE) with the objectives to provide secondary market for
securities transaction. Also, Nepal Rastra Bank (NRB), Company Registrar Office
(CRO), Insurance Board, Concerned Ministers of Government and other related
parties are involved for the development of stock market in Nepal for overall
prosperity (Adhikari, 2013).

2.4.1 Summary of Literature Reviews

Literatures were collected and reviewed on broad basis by considering international
context along with national context. Many journals and articles were reviewed from
various writers to know the different scenario and different perspective regarding
stock market.
In international context, the reviewed study was focused on Asian market where
Karachi Stock Exchange (KSE) and Colombo Stock Exchange (CSE) of Pakistan and
Sri Lanka respectively. Macro economic variables such as Inflation, Interest rate,
Gross Domestic Product (GDP) and Exchange rate were used to study the impact of
such variables on stock index. Both positive and negative impacts were found based
on their study.

24
In major studies, various journal and articles were reviewed on from various authors.
They all had their own inferences depending on the variables they have studied.
Studies of Levine, Spears, Rajan & Zingales, Luintel & Khan, etc were reviewed in
order to know the different perspective of macro-economic variables in the related
countries.

Similarly, in Nepalese context, the past and present scenario of stock price
movements was studied. All the related data were collected from authentic sites such
as SEBON, NEPSE, MOF, NRB, etc. Big players on finance and stock market field
such as R. Bhattarai, R.S. Mahat, M. Shrestha and B. Bhatta had made contribution by
writing articles and books which were studied to know national scenario.

2.5. Research Gap

Reviewing and studying the various studies, researcher has found many of previous
researchers have used similar variables such as GDP, Inflation rate, Unemployment
rate, Exchange rate which are major macro-economic variables. Each variable have
their own significance in the economic system as well as stock market. However, this
report has also measured such variables in my study along with one of the rising
macro-economic variables namely Remittance. As in recent times, Nepalese
economic system has been fully dependent in inward remittance, so this report has
tried to analyze the impact of remittance on stock market. Though the history of
inward remittance goes back a long time but this study has managed to study and
collect data up to previous 23 years. The study of remittance would provide valuable
insight regarding the stock market expansion and its impact on the overall economic
system.

2.6 Review of NEPSE Index

NEPSE represents the short form of Nepal Stock Exchange and NEPSE index
indicates the increase or decrease of total market capitalization of companies’
transactions that are listed in Nepal Stock Exchange. This indicates the increase or
decrease of overall market; therefore it has significant importance to investors. The
investors who cannot analyze the share market, they make decision of purchasing or
selling of shares with the help of this index. The countries in the world where stock
exchange exist calculate one or more market index, but in Nepal only one index is

25
calculated. The only secondary capital market in Nepal, NEPSE operates under
Securities Act, 2007.
Panta (2000) conducted research on determining the stock price movement and
investors’ behavior in Nepal. This study aims to examine the efficiency of the stock
market in Nepal. The specific objectives of the study were:
i. To examine the serial correlation of the successive daily price changes of the
individual stocks.
ii. To determine whether the sequence of price changes is consistent with
changes of the series of random numbers expected under the independent
Bernoulli process.
iii. To determine the efficiency of the stock market through the theoretical model
of efficient market hypothesis in the Nepalese stock market.
iv. To provide feedback policy input towards institutional development of
efficient market.

The main findings of the study were the serial correlation coefficients of the daily
price changes for 1 and 2 lag days, and runs of the series of daily price changes lead
to conclude that the successive price changes are not independent random variable for
the 30 sample stocks listed in the Nepal stock exchanges ltd. (NEPSE). Therefore, the
random walk theory is not a suitable description for the stock market price behavior in
Nepal. The dependence in the series of price changes observed imply that the price
changes in the future market will not be independent from the price changes of the
previous days. It implies that the information of the past price changes is helpful in
predicting future price changes in a way that the speculation through technical
analysis can make higher expected profit than they would be under native buy-and-
hold policy (i.e. average market return). Therefore, opportunities are available to
sophisticated (both institutional and individual) investors to earn higher return in the
market. The existence and participation of the sophisticated investors have not been
realized from the findings of this study. It is realized that mostly the native investors
have dominated in the market that can cause prices to diverge significantly from
intrinsic values because the very existences of the sophisticated traders cause to erase
the opportunities of persistence in prices which establish independence of successive
price changes. He analyzed 30 listed companies’ stock price and found that the
successive price changes are dependent. He finally concluded that he NEPSE is not

26
efficient in pricing shares even in its weak form. Shrestha too had used
autocorrelation and run test to detect the dependence among the stock price series.
The outcomes of both the models were found to be similar and rejecting the null
hypothesis that the successive price changes is independent. Though his research was
not based on the total market return movement, the result drawn from analyzing the
movement of major stocks traded in the market can be generalized for efficiency level
of overall NEPSE. Moreover this research work with the analysis of total market
return and banking sector stock return will be useful to verify his findings as well.

2.7 Review of GDP

Stock return is determined by some macroeconomic variables such as interest rate,
foreign exchange rate and inflation (Ayadi, 1991). According to Fama (1981), the
increase in the real GDP affects the price of the stock through the impact towards
corporate profit. This happens because when there is an increase in the real GDP, the
expected future cash flow in company will increase and the price of the stock
increases. Mukherjee and Naka (1995); and Ibrahim and Aziz (2003) also supported
that there exists positive relationship between real GDP and stock market.

G.C. and Neupane (2006) examine the existence of causality relationship between
economic growth and stock market 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; which also shows impact of GDP on stock market and vice versa.

Nepal’s Gross Domestic Product (GDP) is projected to grow by a mere 0.77% in the
current FY 2015-16, the lowest in 14 years, as the economy is still struggling to
recover from 2015’s devastating earthquake and economic blockade. Main factor in
this study is NEPSE Index which is calculated by considering all listed shares
including that of promoter shares of all listed companies in Nepal Stock Exchange
Limited. As other secondary market indicators, NEPSE Index was in decreasing trend
during the FY 2014/15. The closing NEPSE index remains at 961.23 and the highest

27
point during the year was 1083.55 on 21 July 2014 and the lowest is recorded in 27
May 2015 of 837.83 points. NEPSE index has decreased by 84.66 points which is
8.09 percent during the year. Nepal’s real sector is weakly represented in the stock
market; 84% of the listed companies belong to the financial sector (compelled to be
listed by regulation) which account for only 5% of GDP. The market fluctuates based
on rumors and speculations about pending changes in government policies; driven
largely by retail investors. Also, frequent strikes and other factors affect stock market
seriously (Parajuli, 2015).

2.8 Review of Inflation

Inflation is also an important variable that investors consider before making any
investment decisions. Theoretically, Asprem (1989) put forward that inflation should
be positively related to stock return if stocks provide a hedge against inflation. This is
based on Fisher (1930) who put forward that stock markets are independent of
inflation expectations since equities are a claim against real assets of the company.
Fama (1981) however, disagrees with the generalized Fisher hypothesis on the basis
that an increase in inflation causes uncertainty and reduces future economic activity,
which reduces the stock price. A chief measure of price inflation is the rate, which is
the percentage change in a price index over time (Singh, Mehta & Barsha, 2011).
Economic theory indicates that inflation decreases the purchasing power of business
cash flow. The inflation rate would differ from county to country as the nature of the
country’s economy. Similarly, its impact on stock prices would also different in
capital markets. So, this study includes inflation by the means of change in Consumer
Price Index (CPI) to provide an insight about its possible effect upon the stock prices
from the prospective of an emerging market. Thus, it has been taken to examine its
impact on stock prices in Nepalese stock market.

2.9 Review of Interest rate

Kandir (2008) demonstrate a negative relationship between interest rate and stock
market in a study carried out in the stock exchange of Turkey. Such a negative
relation implies that the investors tend to invest less in stock market as interest rate
goes up causing the stock prices to fall. Thorbecke (1997) explained that liquidity in
the economy could increase with reduction in interest rates. This extra liquidity could
be channeled to the stock market which driving up the demand and prices of stock.

28
Contrary to this, a positive relation between interest rate and stock market return was
found by Ali, Mustafa and Zaman (2011) in his study of impact of micro and
macroeconomic variables on emerging stock market return: A case on Dhaka Stock
Exchange.

Higher interest rates or discount rates would reduce the present value of cash flows,
which would reduce the attractiveness of investment, hence, shrinks the value of stock
returns (Rahman, et al., 2009). Another impact could be through portfolio
substitution, a rise in the rate of interest increases the opportunity cost of holding
cash, which later on leads to a substitution effect between stocks and other interest
bearing securities like bonds (Rahman, et al., 2009). In the literature, the common
interest rate proxies are the treasury bills rates as being employed by Mukherjee and
Naka (1995); Ratanapakorn and Sharma (2007); Yusof and Majid (2007) and Eita
(2012). In case of money supply, Mukherjee and Naka (1995) argue that if an increase
in money supply leads to economic growth, stock prices would benefit from
expansionary monetary policy. In another way, with increase in money supply, the
availability of liquidity at a lower interest rate increases, which can flow into the stock
market.

2.10 Review of Unemployment rate

McQueen and Roley (1993) also found that there is a strong relationship between
stock prices and macroeconomic news, such as news about inflation, industrial
production, and the unemployment rate based on their own definition of business
conditions. However their purpose was to demonstrate the state dependence of stock
price responses to all macroeconomic news. Krueger (1996) studied the market
rationality of bond price responses to labor market news. His focus was on market
reaction to the availability of more reliable information, as the unemployment data
were revised. His study found that market prices were strongly affected by the
unemployment announcements. Fleming and Remolona (1999) analyzed the response
of U.S. Treasury yields across the maturity spectrum to different types of macro-
economic announcements using high frequency data over four-and-a-quarter years.
They found that the yields on intermediate term bonds were more sensitive to
unemployment news.
Jagannathan and Wang (1993) found that monthly stock returns are negatively
correlated with the per capita labor income growth rate. Jagannathan, Kubota and

29
Takehara (1998) reports similar findings using Japanese data. Since most of the
variation in per capita labor income arises from variation in hours worked and not the
wage rate, these findings are consistent with the unconditional positive correlation
between the growth rate in unemployment and stock returns that we find in our data
set.

2.11 Review of Remittance

Enayet and Sultana (2012) defined remittances as the transfer of cash and monetary
items by immigrants to their families in their home country. There are many benefits
of remittances like income distribution and improvement in quality of life especially
for unskilled poor emigrants. Remittance plays an important role in improving the
income level of the family of the emigrants. Bjuggren, Dzansi and Shukur (2010)
claimed that workers’ remittances are an important investment source especially for
developing countries. They found that remittances increase investment.

Reena, Demirguc-Kunt and Peria (2006) claimed that remittance plays a vital role in
financial sector development and found a significant positive impact of remittances on
financial development in developing countries. Acosta, Baerg and Mandelman (2009)
claimed that remittances are very important for developing countries. They expect that
if the financial system is developed, remittance will be high and may be effectively
used for investment.

2.12 Hypothesis
The following hypothesis has been developed to examine the impact of four
macroeconomic variables on Stock Market (NEPSE Index) as follows:
 Null Hypothesis (H01): There is no relationship between GDP and Stock Market
(NEPSE Index).
 Null Hypothesis (H02): There is no relationship between Interest rate and Stock
Market (NEPSE Index).
 Null Hypothesis (H03): There is no relationship between Inflation and Stock
Market (NEPSE Index).
 Null Hypothesis (H04): There is no relationship between Unemployment rate and
Stock Market (NEPSE Index).
 Null Hypothesis (H05): There is no relationship between Remittance and Stock
Market (NEPSE Index).

30
2.13 Conceptual Framework
Miles and Huberman (1994) defined conceptual framework as a visual or written
product, one that explains, either graphically or in narrative form, major concept, key
factors or variables and the presumed relationships among them. The conceptual
framework is primarily a conception or model of what is out there that one plans to
study and of what is going on with these things and why a tentative theory of the
phenomena that is being investigating The function of the theory is to inform the rest
of research design to help to asses and refine research goals, develop realistic and
relevant research questions, select appropriate methods, and identify potential validity
threats to conclusions derived.

Within the conceptual framework conducted in the literature review, certain

relationship has been identified between dependent and independent variables as:

Independent Variables: Dependent Variable:

GDP
Interest rate NEPSE Index
Inflation
Unemployment rate
Remittance

Figure 2.1: Conceptual Framework

31
 CHAPTER III

RESEARCH METHODOLOGY

This chapter deals mainly with the research methodologies which are used in the
period of research. Research means to research the problems again and again to find
out something more about the problems.Similarly methodology refers the various
steps that are generally adopted by a researcher in studying his research problem
along with the logic behind it. Thus, research methodology is a systematic and
organized effort to investigate a specific problem that needs a solution (Wolff and
Pant 1999).
In this regard, this chapter explains not only deal the research method, but also
consider the logic behind the methods which are used in the context of the research
study. So research designs, sources of data, use of statistical tools are basically
explained in this chapter. The stated objectives in mind, both the descriptive and
analytical type of research are employed. A descriptive analysis is used because the
secondary sources of empirical data have been employed to analyze the using
variables, which is related to condition and growth and prospects of stock market.

3.1 Research Design

A research design is the arrangement of conditions for collection and analysis of data
in a manner that aims to combine relevance to the research purpose with economy in
procedure.It includes nature of data, specification of the method of the proposed study
and detail plan for carrying out the study with various empirical data for the analysis
of problems etc.
This study attempts to analyze the impact of GDP, Inflation, Interest rate, Remittance
and Unemployment rate on stock prices. Thus, it has used correlation research design
under the comparative research design for this purpose. Beside this, the tools and
techniques of descriptive and analytical research design have also been very much
helpful for this study for the purpose of finding facts. The descriptive, correlation and
regression analysis was adopted to understand the relationship between
macroeconomic variables and stock market price in Nepalese stock market at present
scenario.

32
3.2 Instrumentation
The study mainly depends upon secondary data which are analyzed using the SPSS
package. Descriptive statistics, correlation and regression tools are used in SPSS
package in order to derive the meaningful relationship among the dependent and
independent variables. In this study, the required available data and information are
shown in figures and computation is done with the help of Statistical tools, calculator
and computer.

3.3 Description of method of analysis

3.3.1 Descriptive Statistics

This study has used the summary of descriptive statistics associated with dependent
and independent variables of 23 years period. The descriptive statistics such as mean,
minimum and maximum values of the variables namely GDP, Interest rate, Inflation,
Unemployment rate and Remittance have been used to describe the characteristics of
NEPSE during the period 1993/94 to 2015/16.

3.3.2 Correlation analysis

This study also employs correlation analysis. This design has been basically adopted
to identify the direction and magnitude of relationship between different pairs of
variables. For this purpose, correlation analysis has been used. It shows how two
variables move together and also shows the degree of association between them. The
relationship has been explained by using Pearson correlation coefficient. The value of
correlation coefficient ranges from -1 to +1. If correlation coefficient is exactly -1,
two variables are said to have perfect negative correlation as such that they move
together exactly into opposite direction. On the other hand, if correlation coefficient is
exactly +1, two variables are said to be perfectly positively related. In this study,
correlation analysis will be conducted through SPSS software to find the relationship
between selected macroeconomic variables on NEPSE Index. Each dependent
variable will be examined and be found out how strongly it might be impacted with
selected each macroeconomic variable.

3.3.3 Regression analysis

In order to set the statistical significance and robustness of the results, the study relies
on secondary data analysis based on the regression model specified. It basically deals

33
with the regression results from various specifications of the model to examine the
estimated relationship of Independent variables as GDP, Inflation, Interest rate,
Unemployment rate and Remittance with dependent variable NEPSE Index.

3.4 Population and Sample

The population of the study for this research design includes stock prices of Nepal for
which present researcher has used NEPSE index and in macroeconomic variables
GDP, Inflation rate, Interest rate, Unemployment rate and remittance are taken as
variables. The annual data from F/Y 1993/94 to 2015/16 and major economic
indicator (GDP, Inflation, Interest rate, unemployment rate, remittance etc) are taken.
Moreover, the companies that are in existence and doing share transactions in NEPSE
and the factor that affects the present economic growth are also considered.

3.5 Model
The following model is used in this research to analyze dependent and independent
variables.

NEPSE = f (GDP)............................ (i)

NEPSE = f (Inflation)...................... (ii)
NEPSE = f (Interest Rate)............... (iii)
NEPSE = f (Unemployment Rate)............. (iv)
NEPSE =f (Remittance).............................. (V)

Hence, the regression model takes the following form:

NEPSE Index = β0+ β1GDP +β2Interest rate+β3Inflation+β4Unemployment rate+

β5Remittance+ ε ……………………….. (i)

Where,

GDP = Gross Domestic Product

ε = Error term

β0, β1, β2, β3, β4& β5 = Regression Coefficient

3.6 Sources of Data

The required data have been collected from the various sources; but mainly from the
annual reports of Securities exchange board of Nepal covering a period of F/Y
1993/94 to 2015/16. The main place of data was the central office of Nepal Stock

34
Exchange (NEPSE), Securities Boards of Nepal (SEBON) and Economic Survey
published by Ministry of Finance (MOF). The main source of data is annual report of
the SEBON. Besides annual report, Independent data of GDP, Inflation, Interest rate,
Remittance and Unemployment rate has been taken from Ministry of Finance,
Government of Nepal, Nepal Rastra Bank, economic survey and bulletins available.
The research is mainly based on the secondary data.
The secondary source of data are the annual report of the Security Board Nepal,
different books from library, periodicals, newspaper cuttings, company’s magazines
etc. Guidelines and unpublished thesis, research work that directly related to the
financial performance and stock market would form secondary data for the purpose of
this study. Significant information is also collected from Internet and various websites
from NEPSE, SEBON, NRB and SEBON.

3.7 Data Collection Techniques

This study is primarily based on secondary sources of data for showing growth of
stock market in Nepal. The secondary sources of data used for analyzing are as
follows:
A. Trading Report published by Nepal stock exchange.
B. Financial statements and other transactions of listed companies listed by
NEPSE.
C. Outside published material directly related to problems and prospects of
primary and secondary market.
D. Booklets published by other related agencies like SEBON, Ministry of
Finance, and T. U. Library as the relevant materials.

3.8 Analysis of Data

Analysis is the careful study of available facts so that one can understand and draw
conclusion from them on the basis of established principles and sound logic. This
study is mostly based on the analysis of secondary data with the help of different
statistical tools. The empirical result has been extracted in this study by using annual
as well as annual average from FY 1993/94 to 2015/16.

35
3.9 Data Analysis Variable
As mentioned above there are mainly four independent variables i.e. GDP, Inflation,
Interest rate, Unemployment rate, Remittance and one dependent variable i.e. NEPSE
Index for the study of Nepalese economy.

36
 CHAPTER IV

OBSERVATION AND ANALYSIS

4.1. Introduction
This chapter is basically focused upon the analysis of data collected from different
secondary sources. It will reveal the performance of macroeconomic variables as
GDP, Inflation, unemployment rate, Interest rate and Remittance on stock market of
Nepal. With reference to various readings and review of literature in the preceding
chapters, effort is made to analyze and diagnose the impact on Nepalese Stock
Market. Different tables and diagrams are drawn to make the result more simple and
understandable. The relevant information and data are collected from Nepal Stock
Exchange (NEPSE), Security Board of Nepal (SEBON) and from different books and
articles. This means that this chapter will show how variables as GDP, Inflation, and
Interest rate, Unemployment rate and Remittance affect Stock market of Nepal from
F/Y 1993/94 to 2015/16.

4.2. Presentation and Analysis of Secondary Data

This section deals with the presentation and analysis of the collected secondary data.
This part of the chapter reveals the growth of Nepalese stock market focusing on
NEPSE Index with factors such as GDP, Unemployment rate, Inflation, Interest rate
and Remittance in different years.

4.2.1 Analysis of NEPSE Index

The data of NEPSE is shown from FY 1993/94 to FY 2015/16, all showing the
closing index value at the respective fiscal years. This analysis enables a visual
inspection of how NEPSE index move with macroeconomic variables and whether
the NEPSE index and the macroeconomic variables tracked each other. The given
below table and figure show the movement of the NEPSE Index through-out the
study period.

Table 4.1 NEPSE Index

(From Fiscal Year 1993/94 to 2015/16)

Fiscal NEPSE Percentage Fiscal NEPSE Percentage of

Year Index of growth Year Index growth (in %)

37
 Points (in %) Points

1993/94 226.03 - 2005/06 386.86 34.95

1994/95 195.48 -13.52 2006/07 683.95 76.8

1995/96 185.61 -5.05 2007/08 963.36 40.85

1996/97 176.31 -5.01 2008/09 749.1 -22.24

1997/98 163.35 7.35 2009/10 477.73 -36.23

1998/99 216.92 32.79 2010/11 362.85 -24.05

1999/00 360.7 66.28 2011/12 389.74 7.41

2000/01 348.43 -3.4 2012/13 518.33 32.99

2001/02 227.54 -34.7 2013/14 1036.11 99.89

2002/03 204.86 -9.97 2014/15 961.23 -7.23

2003/04 222.04 8.39 2015/16 1718.15 178.74

2004/05 286.67 29.11

Source: Annual Report, SEBON 2015/16
The above table presents the data of NEPSE Index from FY 1993/94 to FY 2015/16
and also present the growth of Index in each year. This comparison is necessary is to
evaluate the change in growth of NEPSE with change in growth of other macro
variables.
Further the data can be displayed in figure as follows:

38
 NEPSE Index
2000
1800
1600
1400
1200
1000 NEPSE Index
800
600
400
200
0
4 6 8 0 2 4 6 8 0 2 4 6
3 /9 5 /9 7 /9 9 /0 1 /0 3 /0 5 /0 7 /0 9 /1 1 /1 3 /1 5 /1
9 9 9 9 0 0 0 0 0 1 1 1
19 19 19 19 20 20 20 20 20 20 20 20

Figure 4.1 NEPSE Index Points from FY 1993/94 to FY 2015/16

By analyzing the Table 4.1 and Figure 4.1, it is seen that NEPSE Index in our
beginning stated FY i.e. 1993/94 was 226.03.Then after it decreased until 1998 and
increased to 360.7 in 1999/2000.The increasing & decreasing trend was continued. In
the fiscal year 2013/14, the NEPSE Index was in increasing trend. It was grown by
99.89 percent and reached to 1036.11 whereas the NEPSE Index was only 362.85 in
Fiscal year 2010/11. Due to the political instability, manipulation in price and most of
the listed companies except banking sector not making transaction in capital market,
NEPSE index was negative referring to percentage of growth. In FY 2009/10 and
2010/11 it was -36.23 & -24.05 percentage comparing other base years. However, the
Index went skyrocket in the last fiscal year i.e. 2015/16 up to 1718.15 points after
reaching the highest level of 1881 points.

4.2.2 Analysis of GDP

The total GDP value as of Producer’s current price is taken in each fiscal year. And
the value is presented in millions. Both table and chart presentation is done to analyze
the GDP variable.

Table 4.2: GDP Movement from Fiscal Year 1993/94 to 2015/16

Fiscal GDP( in Rs. Percentage Fiscal GDP( in Rs. Percentage

39
 of Growth of Growth
Year millions) (in %) Year millions) (in %)
-
10.98
1993/94 199272 2005/06 654100

9.99 11.30
1994/95 219175 2006/07 728000

13.57 12.09
1995/96 248913 2007/08 816000

12.70 21.08
1996/97 280513 2008/09 988000

7.25 20.75
1997/98 300845 2009/10 1193000

13.69 14.59
1998/99 342036 2010/11 1367000

10.95 11.70
1999/00 379488 2011/12 1527000

8.27 11.00
2000/01 418079 2012/13 1695000

2.78 15.93
2001/02 422301 2013/14 1965000

8.14 7.89
2002/03 456675 2014/15 2120000

17.55 2015/16 2249000 6.08

2003/04 536800

9.80
2004/05 589400
Source: Economic Survey (various issues), Ministry of Finance, Government of Nepal.

As seen in the above table, each year GDP has been increasing but the percentage in
which it is increasing is different every year. The highest increment of GDP is seen in
FY 2008/09, i.e. of 21.08% whereas the lowest increment is seen in FY 2001/02, i.e.
2.78%. In the recent trends, the GDP has been seen increasing in declining order
because of the earthquake disaster and economic blockade.

40
 Chart Showing GDP Value in different Fiscal Years
2500000

Amount (Rs. in Billions) 2000000

1500000

1000000 GDP

500000

0
4 6 8 0 2 4 6 8 0 2 4 6
3 /9 5/9 7/9 9/0 1/0 3/0 5/0 7/0 9/1 1/1 3/1 5/1
1 99 19
9
19
9
19
9
20
0
20
0
20
0
20
0
20
0
20
1
20
1
20
1

Fiscal Year

Fig: 4.2 GDP value from FY 1993/94 to FY 2015/16

As portrayed in the figure, each year GDP is inclining upwards due to increase in
economic activities by government sectors as well as private sectors. As seen in the
figure, the growth in GDP is somewhat similar in each year which shows stability in
the economic activities.

4.2.3 Analysis of Interest Rate

Annual average interest rate is taken each year to maintain the stability and to avoid
the error occurred through random fluctuation in interest rate.

The table and chart presentation of collected data are displayed as follows:
Table 4.3: Annual Average Interest from Fiscal Year 1993/94 to 2015/16

Percentage
Fiscal Interest of growth Fiscal Interest rate Percentage of
Year rate (%) (in %) Year (%) growth (in %)

1993/94 11 - 2005/06 5.25 -4.55

1994/95 11.5 4.55 2006/07 5.25 0.00

1995/96 12 4.35 2007/08 5.25 0.00

1996/97 12 0.00 2008/09 5.5 4.76

1997/98 15 25.00 2009/10 6.5 18.18

41
 1998/99 10.5 -30.00 2010/11 8.00 23.08

1999/00 10 -4.76 2011/12 8.00 0.00

2000/01 9 -10.00 2012/13 8.00 0.00

2001/02 9.8 8.89 2013/14 7.00 -12.50

2002/03 7.25 -26.02 2014/15 7.50 7.14

2003/04 6.5 -10.34 2015/16 6.25 -16.67

2004/05 5.5 -15.38

Source: Economic Survey (various issues), Ministry of Finance, Government of Nepal.

Chart Showing Annual Average Interest Rate in different fiscal

years
16
14
12
Interest Rate in %

10
8
6 Interest Rate
4
2
0
4 6 8 0 2 4 6 8 0 2 4 6
3 /9 5 /9 7 /9 9 /0 1 /0 3 /0 5 /0 7 /0 9 /1 1 /1 3 /1 5 /1
1 99 1 99 1 99 1 99 2 00 2 00 2 00 2 00 2 00 2 01 2 01 2 01

Fiscal Year

Fig 4.3: Annual Average Interest Rate from FY 1993/94 to 2015/16

As seen in both table and figure, the interest rate rose up to 15% in FY 1997/98 which
is the highest among all other observations. The lowest interest rate is in FY 2004/05
and FY 2008/09 which is 5.5%. After FY 1997/98, it went on declining year by year
up to FY 2008/09. The reason for decline could be due to increase in banking and
financial institutions which had large amount of capital to supply. Until recent year
due to credit crunch, it has remained stable. Currently, the tightening of credit creation

42
by NRB has led many banks and financial institutions to limit their credit transaction
thus increasing the market interest rate.

4.2.4 Analysis of Inflation Rate

Inflation rate is the rate which determines the purchasing power capacity. It is highly
relevant in the stock market to determine the fund capacity of the investors. Annual
average inflation rate is taken to make avoid the random fluctuations throughout the
year.

The table and chart presentation of collected data are displayed as follows:

Table 4.4: Annual Average Inflation from Fiscal Year 1993/94 to 2015/16
Percentage
Fiscal Inflation of growth Fiscal Inflation Percentage of
Year (%) (in %) Year (%) growth (in %)

1993/94 7.5 - 2005/06 8 77.78

1994/95 8.3 10.67 2006/07 5.9 -26.25

1995/96 7.6 -8.43 2007/08 6.7 13.56

1996/97 9.2 21.05 2008/09 12.3 83.58
1997/98 8.1 -11.96 2009/10 9.6 -21.95

1998/99 3.5 -56.79 2010/11 9.6 0.00

1999/00 2.1 -40.00 2011/12 8.3 -13.54

2000/01 2.4 14.29 2012/13 9.9 19.28

2001/02 2.9 20.83 2013/14 9.1 -8.08

2002/03 4.8 65.52 2014/15 7.2 -20.88

2003/04 4.0 -16.67 2015/16 9.5 31.94

2004/05 4.5 12.50

Source: Economic Survey (various issues), Ministry of Finance, Government of Nepal.

43
 Inflation Rate
14

12

10

8
Inflation Rate
6

0
4 6 8 0 2 4 6 8 0 2 4 6
3 /9 5 /9 7 /9 9 /0 1 /0 3 /0 5 /0 7 /0 9 /1 1 /1 3 /1 5 /1
9 9 9 9 0 0 0 0 0 1 1 1
19 19 19 19 20 20 20 20 20 20 20 20

Fig 4.4: Annual Average Inflation Rate from FY 1993/94 to 2015/16

As shown in both table and figure, the data has been observed from FY 1993/94 to FY
2015/16. Throughout the observed period, variation in inflation rate can be seen. The
highest inflation rate can be observed in FY 2008/09 i.e. 12.3% whereas, the lowest is
in FY 1999/00 i.e. 2.1%. Basically, the inflation rate is influenced by the money
circulation in the economy which was found to be more in FY 1999/00. In recent
years, inflation has stood up to near about 6% which is quite moderate.

4.2.5 Analysis of Unemployment Rate

Unemployment rate determines the number of people being engaged in the economic
activities in order to uplift the overall economic system. Such rate is useful to
determine the earning capacity and investing ability. So, average unemployment rate
is taken into consideration to make the rate stable and reliable.

44
The table and chart presentation of collected data are displayed as follows:
Table 4.5: Annual Average Unemployment Rate from Fiscal Year 1993/94 to 2015/16

Unemploym Percentage Unemploym

Fiscal ent Rate of growth Fiscal ent Rate Percentage of
Year (%) (in %) Year (%) growth (in %)

1993/94 2.1 - 2005/06 2.4 20.00

1994/95 2.23 6.19 2006/07 2.59 7.92

1995/96 2.24 7.62 2007/08 2.59 0.00

1996/97 4.45 85.42 2008/09 3 15.83

1997/98 3.8 -14.61 2009/10 2.7 -10.00

1998/99 1.8 -52.63 2010/11 2.7 0.00

1999/00 1.89 5.00 2011/12 2.7 0.00

2000/01 2.7 42.86 2012/13 2.7 0.00

2001/02 8.59 2185.15 2013/14 2.7 0.00

2002/03 2.7 -68.57 2014/15 3 11.11

2003/04 2 -25.93 2015/16 3.2 6.67

2004/05 2 0.00
Source: Economic Survey (various issues), Ministry of Finance, Government of Nepal.

45
 Unemployment Rate
10
9
8
7
6
5
4 Unemployment Rate
3
2
1
0
4 6 8 0 2 4 6 8 0 2 4 6
3 /9 5 /9 7 /9 9 /0 1 /0 3 /0 5 /0 7 /0 9 /1 1 /1 3 /1 5 /1
9 9 9 9 0 0 0 0 0 1 1 1
19 19 19 19 20 20 20 20 20 20 20 20

Fig 4.5: Annual Average Unemployment Rate from FY 1993/94 to FY 2015/16

The above table and figure depicts the annual average unemployment rate from FY
1993/94 to FY 2015/16. Throughout the observed period, the highest unemployment
rate can be seen in FY 2001/02 which is 8.52% and the lowest is in FY 1998/99 which
is 1.8%. Such unemployment rates are determined by the amount of economic
activities and the willingness of people to engage in economic activities. In recent
times, many people facing employment problem due to lack of economic
opportunities, tough competition among available human resource and lack of job
according to their own skills and talents.

4.2.6 Analysis of Remittance

Remittance is taken as another economic variable which makes availability of capital.
Inflow of remittance amount is taken into consideration to measure its impact in
NEPSE Index. Basically, remittance is the foreign income earned and injected in the
domestic economic system.

46
The table and chart presentation of collected data are displayed as follows:

Table 4.6: Annual Inward Remittance from Fiscal Year 1993/94 to 2015/16
Remittance Percentage Remittance
Fiscal (Rs. In of growth (in Fiscal (Rs. In Percentage of
Year Billion) %) Year Billion) growth (in %)

1993/94 2.23 - 2005/06 76.90 -10.49

1994/95 18.43 726.46 2006/07 100.1 30.17

1995/96 7.16 -61.15 2007/08 142.7 42.56

1996/97 9.80 36.87 2008/09 209.7 46.95

1997/98 12.86 31.22 2009/10 231.7 10.49

1998/99 16.27 26.52 2010/11 253.6 9.45

1999/00 12.88 -20.84 2011/12 359.6 41.80

2000/01 35.58 176.24 2012/13 434.6 20.86

2001/02 47.22 32.72 2013/14 543.3 25.01

2002/03 75.41 59.70 2014/15 617.3 13.62

2003/04 42.01 -44.29 2015/16 679.0 10.00

2004/05 85.91 104.50

Source: Economic Survey (various issues), Ministry of Finance, Government of Nepal.

47
 Remittance
800
700
600
500
400
300
200 Remittance
(Rs. In Bil-
100 lions)
0
4 6 8 0 2 4 6 8 0 2 4 6
3 /9 5 /9 7 /9 9 /0 1 /0 3 /0 5 /0 7 /0 9 /1 1 /1 3 /1 5 /1
1 99 1 99 1 99 1 99 2 00 2 00 2 00 2 00 2 00 2 01 2 01 2 01

Fiscal Year

Fig 4.6: Annual Inward Remittance from FY 1993/94 to FY 2015/16

The above table and figure depicts the annual remittance amount injected in the
economy from FY 1993/94 to FY 2015/16. As seen in both figure and table, the
amount has been increasing year by year. The highest amount can be observed in
recent FY 2015/16 which is Rs. 679 billion whereas, the lowest amount can be
observed in base FY 1993/94 which is Rs. 2.23 billion. The increase in remittance
amount is mainly caused by the increase in number of people working abroad which
is also increasing year by year. Other than that, increase in establishment of business
houses in foreign country, liberalization in foreign direct investment has also helped
in increasing the inward remittance amount.

4.3 Descriptive Statistics

The descriptive statistics used in this study consists of mean, standard deviation,
minimum and maximum values associated with variables under consideration. Table
4 summarizes the descriptive statistics of variables used in this study during the
period 1993/94 through 2015/16 associated with Nepal Stock Exchange.

48
 Table 4.7: Descriptive Statistics

N Minimum Maximum Mean Standard

Deviation

NEPSE Index 23 163.35 1718.15 480.93 382.71

GDP 23 199272.0 2249000 856017.26 654623.39
Interest rate 23 5.25 15 8.37 2.68

Inflation 23 2.1 12.3 7.00 2.76

Unemployment 23 1.8 8.59 2.91 1.38

Rate
Remittance 23 2.23 679.00 174.53 210.25
Source: SPSS Output

Table 4.7 describes the descriptive statistics considering Mean, Standard Deviations,
Minimum, Maximum and Total number of Sample of NEPSE Index, GDP,
Unemployment rate, Interest rate and Inflation. Data from 23 years period are taken in
this research where minimum NEPSE Index was 163.35 in FY 1997/98 and maximum
was 1718.15 in FY 2015/16. The mean NEPSE Index and standard deviation was
480.93 and 382.71 respectively. Also, the GDP in million are taken as independent
variable in this research where minimum GDP was Rs. 199272.0 million and
maximum was Rs. 2249000 million where mean GDP and standard deviation was
Rs.856017.26 million and 654623.39 million respectively.
Similarly, other independent variables as Interest rate, Inflation Unemployment rate
and Remittance were taken whose Mean and Standard deviations were 8.37%, 7.00%,
2.91%, Rs. 174.53 billion respectively. Minimum Interest rate, Inflation,
Unemployment rate and Remittance were 5.25%, 2.1%, 1.8% and Rs. 2.23 billion
whereas Maximum was 15%, 12.3%, 8.59% and Rs. 679 billion respectively.
4.4 Correlation analysis
This study also employs correlation analysis. This design has been basically adopted
to identify the direction and magnitude of relationship between different pairs of
variables. For this purpose, correlation analysis has been used. It shows how two
variables move together and also shows the degree of association between them. The
relationship has been explained by using Pearson correlation coefficient. The value of
correlation coefficient ranges from -1 to +1. If correlation coefficient is exactly -1,
two variables are said to have perfect negative correlation as such that they move

49
 together exactly into opposite direction. On the other hand, if correlation coefficient is
exactly +1, two variables are said to be perfectly positively related. The below table
shows the Pearson correlation where NEPSE Index is dependent variable and GDP,
Inflation, Interest rate, Unemployment rate and Remittance are Independent variables.

Table 4.8: Correlation between NEPSE Index, GDP, Interest Rate, Inflation
Rate, Unemployment Rate and Remittance

NEPSE GDP Interest Inflation Unemploymen Remittance

Index (million) Rate Rate t Rate
Pearson
1
Correlation
NEPSE
Sig. (2-
Index
tailed)

Pearson
.789** 1
Correlation
GDP(million) Sig. (2-
.000
tailed)

Pearson
-.534 -.488* 1
Correlation
Interest Rate Sig. (2-
.009 .019
tailed)

Pearson
0.358 .486* -.244 1
Correlation
Inflation Rate Sig. (2-
.093 .019 .261
tailed)

Pearson
-.048 -.043 -.012 -0.77 1
Correlation
Unemployment Sig. (2-
.829 .847 .957 .726
Rate tailed)

Pearson 1
.815** .987** -.203 .476* -.020
Correlation
Remittance
Sig. (2-tailed) .000 .000 .352 .022 .930

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).
Source: SPSS Output

50
The table above shows the relationship between NEPSE Index and GDP, Interest
Rate, Inflation Rate, Unemployment Rate and Remittance where NEPSE Index is a
dependent variable. In the above table, it can be seen that NEPSE Index and GDP
correlate positively with strong moderate value of 0.789. Also, NEPSE Index has
positive correlation with Inflation and Remittance with the values of 0.358 and 0.815
respectively. In addition, correlation between NEPSE Index and Interest rate has
negative moderate relation with value of -0.534 and weak negative relation with
Unemployment rate with value of -0.048.

Hence, it can be concluded that Increase in GDP, Inflation, and Remittance implies
increase in Stock market i.e. NEPSE Index of Nepal whereas Increase in Interest rate
and Unemployment results decrease in Stock Price i.e. NEPSE Index of Nepal and
vice versa.
4.5 Regression analysis
Regression analysis helps to understand how the typical value of the dependent
variable changes when any one of the independent variables is varied, while the other
independent variables are held fixed. Regression Analysis is known as the useful
device to determine the strength of relationship between independent and dependent
variables. In statistical modeling, regression analysis is a statistical process for
estimating the relationships among variables.
For this one dependent variable is used i.e. NEPSE Index and five independent
variables are used as GDP, Unemployment rate, Interest rate, Remittance and
Inflation from fiscal year 1993/94 to 2015/16.

4.5.1 Interpretation of R
In statistics, Pearson correlation measures the degree of strength and direction of a
linear relationship between two variables when the data (X and Y values) consist of
numerical scores from an interval or ratio scale of measurement. The value of R is
always between +1 and –1.

4.5.2 Interpretation of adjusted R square

R square shows how well terms (data points) fit a curve or line. Adjusted R square
also indicates how well terms fit a curve or line, but adjusts for the number of terms in
a model. Adjusted R square will always be less than or equal to R square.

51
If we add more and more useless variables to a model, adjusted R square will
decrease. If we add more useful variables, adjusted R square will increase. Both R
square and the adjusted R square give us an idea of how many data points fall within
the line of the regression equation. However, there is one main difference between R
square and the adjusted R square. R square assumes that every single variable
explains the variation in the dependent variable but the adjusted R square tells us the
percentage of variation explained by only the independent variables that actually
affect the dependent variable.

4.5.3 Interpretation of P-Value

The customary levels of significance are 0.10, 0.05, and 0.01 and so on. In this
research study, 5 per cent (α = 0.05) level of significance is used for analysis.
Therefore,
If, p>0.05: Null hypothesis will be accepted, and
If, P<0.05: Null hypothesis will be rejected

4.5.4 Regression results and testing of hypothesis

The results are based on secondary data collected from NEPSE, SEBON and NRB
publication. In this research paper, impact of five independent variables on one
dependent variable (NEPSE Index) is examined. In the regression analysis, present
researcher analyses the impact of five macroeconomic variables; GDP, Inflation,
Interest rate, Remittance and Unemployment rate on Stock market of Nepal. For this,
one simple regression models is used as follows:
 Model: Regression analysis between NEPSE index and inflation, interest rate,
GDP, unemployment rate and remittance.
Hence, on the basis of calculation under SPSS software, following hypothesis were
developed like before as:
 Null Hypothesis (H01): There is no relationship between GDP and Stock Market
(NEPSE Index).
 Null Hypothesis (H02): There is no relationship between Interest rate and Stock
Market (NEPSE Index).
 Null Hypothesis (H03): There is no relationship between Inflation and Stock
Market (NEPSE Index).
 Null Hypothesis (H04): There is no relationship between Unemployment rate and
Stock Market (NEPSE Index).

52
 Null Hypothesis (H04): There is no relationship between Remittance and Stock
Market (NEPSE Index).

Table 4.9: Regression Analysis between selected macroeconomic variables and

NEPSE Index

Model Summary
Model R R Square Adjusted R Square Std. Error of the
Estimate
a
1 .875 .765 .696 211.02587
a. Predictors: (Constant), Unemployment rate, Interest rate, GDP, Inflation, Remittance

ANOVAa
Model Sum of Squares Df Mean Square F Sig.
Regression 2465186.213 5 493037.243 11.072 .000b
1 Residual 757042.595 17 44531.917
Total 3222228.808 22
a. Dependent Variable: NEPSE Index
b. Predictors: (Constant), Unemployment rate, Interest rate, GDP, Inflation, Remittance

Coefficientsa
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
(Constant) 1017.886 325.022 3.132 .006
GDP -.001 .001 -1.725 -2.003 .061
Interest rate -56.681 22.362 -.397 -2.535 .021
1 Inflation 7.230 19.224 .052 .376 .712
Unemploymen
3.832 33.815 .014 .113 .911
t rate
Remittance 4.235 1.486 2.327 2.851 .011
a. Dependent Variable: NEPSE Index
Source: SPSS Output

The above table shows that coefficient of 0.875 (R) suggests that there is positive
relationship between selected macroeconomic variables and NEPSE index while
adjusted R square = 0.696, suggests that selected macroeconomic variables could
impact on NEPSE index up to the 69.6%.

53
The regression result shows the coefficient of GDP (β1), Interest rate (β2), Inflation
(β3), Unemployment rate (β4) and Remittance(β5) have the values of -1.725, -0.397,
0.052 and 0.014 and 2.327 respectively.
Similarly, the regression result shows the p-value of GDP, Interest rate, Inflation,
Unemployment rate and GDP are 0.061, 0.021, 0.712, 0.911 and 0.011 respectively.
Here, GDP has p-value of 0.061 which is more than α of 0.05 so null hypothesis is
accepted. Similarly, but the p-value of Inflation and Unemployment rate are 0.712 and
0.911 respectively which is greater than α of 0.05 so null hypothesis is accepted.
However, p-value of Interest rate and Remittance are 0.021 and 0.011 which is less
than α of 0.05 so null hypothesis is rejected.

Thus,
 The model is statistically moderate significant at 0.05 level.

 H01 is accepted because p-value > α and β1= -1.725. This means GDP does not
impact significantly on NEPSE index.

 H02is rejected because p-value < α and β2 = -0.397.This means interest rate
significantly impact on NEPSE index and impacts negatively on NEPSE Index.

 H03 is accepted because p-value > α and β3 = 0.052. This means Inflation does not
significantly impact on NEPSE index.

 H04 is accepted because p-value > α and β4 = 0.014. This means Unemployment
rate does not significantly impact on NEPSE index.

 H05 is rejected because p-value < α and β5 = 2.327. This means Remittance
significantly impact on NEPSE index and impacts positively on NEPSE Index.

54
 CHAPTER V

RESULTS AND DISCUSSION

In the previous chapter, data were collected and analyzed through various statistical
tools to make produce certain outcomes. Those outcomes provide the basis for
reviewing and drawing conclusions for the research. So in this chapter, results of the
analyzed data will be summarized along with some discussions on the report.

5.1 Summary of the results

The data were tested whether there is a significant or insignificant relationship
between dependent variable (NEPSE Index) and Independent variables as GDP,
Inflation, Interest rate, Unemployment rate and Remittance. The following table
shows the summary of testing of hypothesis by researcher:
Table 5.1 Summary of Results
Hypothesis Statement Results

H01 There is no relationship between GDP Accept

and Stock Market (NEPSE Index).

H02 There is no relationship between Interest Reject

rate and Stock Market (NEPSE Index).

H03 There is no relationship between Accept

Inflation and Stock Market (NEPSE
Index).

H04 There is no relationship between Accept

Unemployment rate and Stock Market
(NEPSE Index).

H05 There is no relationship between Reject

Remittance and Stock Market (NEPSE
Index).

54
As shown in the above table, the report has formulated 5 hypotheses to know the
impact of macro-economic variables on NEPSE Index. All the 5 hypotheses were
formulated showing that NEPSE Index has no significant relationship with all
observed independent variables. Standardized formulation of hypothesis helps to
avoid biasness and inconclusive outcomes.
Among 5 hypotheses, 3 null hypotheses have been accepted which shows there is no
significant relationship of GDP, Inflation rate and Unemployment rate on NEPSE
Index. The insignificant relationship shows that NESPE Index is not influenced by
those variables and has little or no impact on its performance. However, 2 null
hypotheses have been rejected making acceptance of alternative hypotheses which
shows there is significant relationship of Interest rate and Remittance on NEPSE
Index. The significant relationship shows that interest rate and remittance have much
more impact on the performance of NEPSE Index.
This significance is also proved by the current scenario of Nepalese context. In recent
times, there has been fluctuation in the interest rate caused by the liquidity crunch
which resulted in the increase in the interest rate. The incremental interest rate made
investable fund much more costly and led to decrease in investment. Such decrease in
investment brought less capital inflow in capital market i.e. stock market. This
ultimately resulted in decrease in the stock market.

5.2 Discussion
The study examined various macro-economic variables like GDP, inflation rate,
interest rate, unemployment rate and remittance which were independent variables
whereas NEPSE Index was measured making it dependent variable. All the variables
have their own significance towards the economy and directly or indirectly affect the

55
stock market. These macro economic variables provide the basis for analyzing the
economic scenario for any country. In this report, it has been used to determine the
economic condition of Nepal which directly influences the stock market and the
variables will also play vital role to predict the economic scenario for the future
purpose.
Attari, Irfan and Safdar (2013) studied the relationship of macro variables such as
interest rate, inflation and gross domestic product to measure its impact on stock
market of Karachi Stock Exchange (KSE) of Pakistan. They have found the
significant relationship with them. But in this study, only interest rate has been found
significant while other variables were not significant for stock market. The reason
behind such differences might be due to nature of the economy of respective
countries. As Pakistan’s economy is boosted up while Nepal’s economy is still under
developing stage.
The study of impact of interest rate and inflation rate on stock market in this paper has
been found similar to the study made on Colombo Stock Exchange (Menike, 2006). It
studied the effect of macroeconomic variables on stock market of Colombo Stock
Exchange of Sri Lanka. The variables such as exchange rate, inflation rate and interest
rate were used. All the variables showed negative relationship on stock prices.
However in this study, inflation has showed positive relationship whereas, interest
rate has showed negative relationship with the movement of stock prices.
This study can also be related with the study made on two gulf countries; United Arab
Emirates (UAE) and Kingdom of Saudi Arabia (KSA). In the study, for short term,
the GDP influence negatively on stock market price for UAE while having no
relationship between them for KSA (Mgammal, 2012). But in long run, GDP
influence positively on stock market price index. However, in this research paper,
GDP of Nepal has been found insignificant with stock market of Nepal (NEPSE) in
both short term as well as long term. This scenario may be due to differences in the
economic growth supported by the GDP. Nepal has not been able to maintain
economic sustainability with the increase in GDP which is not making any significant
impact on the stock market.
The study made on Stockholm Stock Exchange (OMXS30) also investigated many
macroeconomic variables. The statistical analysis found that inflation has significant
negative influence on stock price, interest rate is negatively related to stock price with
no any significance and unemployment rate is positively associated to stock price with

56
no any significance (Talla, 2013). However, in this research paper, inflation has
positive relationship with no any significant impact. The outcome being contradictory
is due to impact of inflation on the economy in respective countries. Developed
countries like Sweden adopts various measures to avoid higher inflation which result
in contraction of money supply and results in decrease in stock market. But in context
of Nepal, such measures are not viable and have no significant impact. Similarly,
Interest rate has negative impact with significant impact on stock market whereas;
unemployment has also negative impact with no any significant impact.
This research report examines the impact of remittance variable which can be related
to the previous study conducted by R.A. Levine. Market liquidity and economic
growth measured by GDP has significant impact on the stock market performance
(Levine, 1996). The same result can be found in terms of liquidity measure by
remittance which is the major source for inflow of funds.
The study conducted by Singh (2014) in the Indian stock market; BSE 100 and CNX
100 measured various macroeconomic variables such as GDP, money supply, interest
rate, trade deficit, crude oil price, exchange rate and gold prices. Similar result i.e.
positive relationship has been found in GDP and negative relationship with interest
rate. Such similarity in result occurred due to common economic transaction among
the countries which directly impact on each others’ economy.
Joshi (2010) made similar study to examine the relationship of stock market with
economic growth and the result made similarities in some study period of time
whereas result differed in other study period. The finding was not significant
association among stock market and economic growth during mid July 1994 to mid
July 200 while positive relation was found during mid July 2000 to mid July 2008.
The major discussion of this study lies on the issue regarding the insignificant impact
of GDP in stock market. Unlike Singh (2014) and Levine (1996), who have found
impact of GDP is significant to stock market; this study contradicts with such result.
Basically, the study conducted by Singh (2014) and Levine (1996) has been made on
the developed economy having efficient market but in context of Nepal, such market
seems to be inefficient having biased perception and sentiment during investment
decision. The investment habit of many investors is still based on their judgmental
analysis based on rumors which makes the market inefficient (Bhatta, 1997). So, the
result of GDP being insignificant still shows that Nepalese stock market is yet to be
developed and efficient.

57
This research paper examines the study period from 1993/94 to 2015/16 and find that
those association being insignificant.
As result showed in above chapter, GDP, Inflation and unemployment were
insignificant to the NEPSE Index, it made quite obvious that they play little role in
influencing the stock market. The major reason behind it being insignificant is that it
could not necessarily provide the boost to the sentiment of the investors which play
the major role in the increase in the stock market. Those macro economic variables
are related to more general level and had less significance in the capital market.
However, interest rate and remittance has been quite close to the capital market and
directly influence the sentiment of investors. The more capital from high remittance
and low interest rate, there is availability of more capital for investment, which is
necessary to boost up the stock market.
Among various independent variables, remittance was found to be new in the stock
market. Measuring the remittance has made the study much more precise which
played significant impact on the stock market movements.
Basically, in recent times, Nepal has found to be much more dependent on the inward
remittance. The volume and amount of remittance has found to be increasing year by
year thus producing huge amount of capital for the stock market. The more capital,
the more investable opportunity in the equity market; which has direct impact on the
stock market movements. The positive impact has been also supported by the data
analysis and findings section. However, the flow of remittance is also dependent on
various aspects which have not been studied as it is not required in this report.

58
 CHAPTER VI

FINDINGS, CONCLUSION AND RECOMMENDATION

In the previous chapters, introduction, review of literature, research methodology and

presentation and analysis of data were done. This concluding chapter has three main
functions. The first is to present the summary of the study which has been set
throughout the study. The second part is conclusion of the paper. In this part, the
findings of the study will be presented. At last, the scope of future research is
reported.
6.1 Summary of Findings
Macro and micro economic fundamentals impact on stock prices in one or other ways.
The economic activities in the country determine the values of macro and micro
economic variables whereas perfect capital market is also the mirror of country’s
economy. Thus, capital market and economic variables are related each other or we
can say economic activities influence the stock prices. With this linkage between
capital market and economic variables, present study has been conducted. This study
found that GDP does not have impact on stock prices which is contradictory to the
findings of Mgammal (2012).

Economic activities have become an integral part for capital market as they directly
and indirectly affect it. Stock market heavily relies on the flow of capital in the market
and changes according to the scenario of national economy. Similarly, stock market is
considered as the leading indicator for an economy. So, it can play a vital role in
encouraging and channeling the saving to provide the entrepreneurs for investment in
profitable projects in the economy. Examples from the developed countries have
proved that the economic development is the cause for the improvement in capital
market. Stock market serves as a direct link between the suppliers and the users of
capital fund. Thus, stock market has both theoretical and practical perspectives. This
study mainly aims to examine the situation of stock market in Nepal through 5
macroeconomic variables.

59
During the fiscal year 1993/94, the growth of NEPSE Index was in fluctuating manner
due to the decline in the investor’s confidence level on the capital market. Similarly,
GDP is also in increasing trend from base year and unemployment rate is also seems
satisfactory. Also, Interest rate is in fluctuating trend and Inflation has an average
trend.

This study assesses the impact of five macroeconomic variables; GDP, Inflation,
Interest rate, Remittance and Unemployment rate on stock prices in Nepalese capital
market. This study is totally based on the secondary data which are collected from
NRB, SEBON and NEPSE publications for the period of 1993/94 to 2015/16.

To achieve the objective of impact of selected macroeconomic variables on stock

market of Nepal, the main objective of this study, present researcher examines the
impact of each selected macroeconomic variable on NEPSE index. Hence, the major
findings of the study from the analysis of secondary data are as follows:
a) From the analysis of Stock Market and its performance in various years, major
factors such as GDP, Inflation, Interest rate, Unemployment rate and
Remittance were taken and it can be concluded that these factors have
contributed in development of stock market in Nepal.
b) NEPSE Index continuously declined after its establishment in 1993 till the
fiscal year 1997/98. Then it was in increasing trend till 2001. Due to the weak
law and difficult situation, industrial service and trading sector cannot do well.
So, NEPSE Index also was in decreasing trend again up to the fiscal year
2002/03. After that there was increasing trend of NEPSE Index because of
political consensus has built up and index reached up to 963.36 in fiscal year
2007/08. Also, after 2007/08 it was in decreasing trend till it reached at
highest point of 1036.11 in 2013/14. Later on, the Index reached all time high
of 1881 points in FY 2015/16.
c) GDP in the base year 1993/94 was Rs. 199,272 million which increased
continuously and reached to Rs. 2, 249,000 million in FY 2015/16. Average
interest rate was considered throughout 23 years data and was maximum in FY
1993/94 i.e. 11% and was minimal in from FY 2005/06 to 2007/08 i.e. 5.25%.
Similarly, Inflation of 12.3% was found to be maximum rate in FY 2008/09
and minimum was of 2.435% in FY 1999/00. Unemployment rate was
minimum in FY 1998/99 i.e. 1.8% and maximum was 8.59% in FY 2001/02.

60
d) From correlation analysis, it is found that NEPSE Index and GDP correlate
positively with moderate value of 0.789. Also, NEPSE Index and Interest rate
has negative correlation with the value of -0.534. In addition, correlation
between NEPSE Index and Inflation rate has positive relation with value of
0.358 and weak negative relation with Unemployment rate with value of -
0.048. However, correlation between NEPSE Index and Remittance has
positive relation with value of 0.815 Hence, it can be concluded that Increase
in GDP, Inflation and Remittance implies increase in Stock market i.e. NEPSE
Index of Nepal whereas Increase in Interest rate and Unemployment results
decrease in Stock Price i.e. NEPSE Index of Nepal and vice versa.
e) Regression analysis shows that coefficient of 0.875 (R) suggests that there is
positive relationship between selected macroeconomic variables and NEPSE
index while adjusted R square = 0.696, suggests that selected macroeconomic
variables could impact on NEPSE index up to the 69.6%.
f) Similarly, the regression result shows the p-value of GDP, Interest rate,
Inflation, Unemployment rate and GDP are 0.061, 0.21, 0.712, 0.911 and
0.011 respectively. Here, GDP has p-value of 0.061 which is more than α of
0.05 so null hypothesis is accepted. Similarly, but the p-value of Inflation and
Unemployment rate are 0.712 and 0.911 respectively which is greater than α
of 0.05 so null hypothesis is accepted. However, p-value of Interest rate and
Remittance are 0.21 and 0.011 which is less than α of 0.05 so null hypothesis
is rejected.

Thus,
 The model is statistically moderate significant at 0.05 level.

 H01 is accepted because p-value > α and β1= -1.725. This means GDP does
not impact significantly on NEPSE index.

 H02is rejected because p-value < α and β2 = -0.397.This means interest rate
significantly impact on NEPSE index and impacts negatively on NEPSE
Index.

 H03 is accepted because p-value > α and β3 = 0.052. This means Inflation
does not significantly impact on NEPSE index.

61
  H04 is accepted because p-value > α and β4 = 0.014. This means
Unemployment rate does not significantly impact on NEPSE index.

 H05 is rejected because p-value < α and β5 = 2.327. This means Remittance
significantly impact on NEPSE index and impacts positively on NEPSE Index.

g) Besides findings from data, other findings can be presented as follows:

 In Nepalese context, GDP doesn’t play vital role in stock market
performance which is contradictory from international context.
 Remittance has been affecting the stock market because of the higher
flow of capital in the market which is seen in current trend.
 As bank’s interest rate is higher, stock market goes down due to lack of
availability of investable fund at low cost.
 Many psychological aspects of investors are also impact the
performance of stock market.

6.2 Conclusion
This paper examined the long-run co-integrating relationship between economic
growth in Nepal and stock market development through NEPSE Index. Using 23
annual observations of GDP, Inflation, Interest rate, Unemployment rate and
Remittance from FY 1993/94 to 2015/16, the results of co integrated regression shows
that both stock market size and liquidity can predict the economic growth of Nepal
over the sample period. Employing bi-variate Correlation and Linear Regression
model it confirms the stable long-run equilibrium relationship between stock market
development and economic growth.

There was not much of the study conducted regarding the impact of macroeconomic
variables on stock prices in Nepalese capital market. However, this study has
provided the relationship status between selected macroeconomic variables and
NEPSE index. This study also found the impact of Interest rate and Remittance on
stock prices in Nepalese capital market whereas; other variables didn’t make much
impact.

This study concludes that, there are several variables affecting the Stock Market of
Nepal (NEPSE Index) as GDP, Interest rate, Inflation, Unemployment rate,
Remittances etc. Increase or Decrease in these major variables would affect the
functioning of NEPSE. Under the reviews from different scholars from national and

62
international context, NEPSE is affected by these variables. Hence, the major
concluding remarks of this study are increase in remittance and decrease in bank
interest rate of Nepal has significantly contributed to the increase in NEPSE Index
and vice versa.

Due to various reasons, this research work is not able to study the completely
Nepalese capital market in detail. Alternatively, the subject matter of Research is done
by concentrating on some important variables and ignoring others. That is why this
research is also not free from limitations. The cores of this study are based on
secondary sources of information. Hence, any incorrectness in the key information
like NEPSE index, from SEBON’s data and economic variables as GDP, Interest rate,
Inflation, Remittance and Unemployment rate from the secondary sources might
affect the accuracy of the outcome of study. The study has selected 23 years data
which do not really represents true samples size. So, the conclusion made cannot
reflect to the true picture of present context of Nepalese Capital Market as in the way
Nepalese Capital Market does not reflect true economy of country.

6.3 Recommendations
Capital market is the mirror of the country’s economy but Nepalese capital market is
still in infant and has low level of impact on national economy. It has not mobilized
the resources properly and has not developed as desired rate due to lack of serious
efforts in the implementation of plans, policies and programs. This paper recommends
the following specific points to enhance the Nepalese capital market:
a) Few manufacturing and production companies are listed in the NEPSE and
banking and financial companies are dominant the capital market. So, some
schemes and policies should bring to encourage the real sector and service
sector companies to be a public limited company.
b) The pace of economic development should be accelerated in order to have its
positive impact on the security market development. Bringing the new
technology and go to the online trading could increase the investors and have
easy excess to the capital market.
c) NEPSE and the related companies should also provide smooth mechanism,
reliable and adequate information regarding the transaction and other aspects
so that maximum number of investors could participate in investing in to
security.

63
 d) To pace the economic development in the country political stability is
necessary. So, government should try to maintain the political stability and
create the investment environment which enhances the capital market as well
as economic activities of the nation.

6.4 Scope for Further Study

This study has added up to the existing literature and also has opened up the avenue
for further studies to investigate the purported link between macroeconomic variables
and stock prices. Hence, the following recommendation is made for further study:
a) This study is limited in only five macroeconomic variables as GDP, Inflation,
Interest rate, Unemployment rate and Remittance. The possible extension of
this study is to consider the impact of other macroeconomic variables such as
broad Money Supply, exchange rate and industrial production rate, which are
not included in this study.
b) Studies can be conducted over a longer time horizon and daily data to obtain
more reliable data pertaining to the macroeconomic variables time series and
the stock prices.
c) Similarly, future research can be conducted by using additional econometric
technique and model which may provide additional strength on conclusion of
the research study.

64
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