Abstract
Stock markets play a significant role for investors and financial institutions and help them to in order to mobilize their finances and provide platform to buy and sell their stock. In any country stock market has a significant effect on the economy as it regulates money and debts. This helps in focusing on the allocation of our investment and resources efficiently. This further enhances the structure of stock market and guide future direction for investment opportunities. Equity market is considered as a source of capital for the investors and financial organizations. The aim of our is to investigate the Karachi stock market liquidity using firm level data describing the real economic activity of the country by controlling equity and non equity factors. For this purpose, alternative liquidity proxies are applied to economic indicators by taking the stock sample from KSE during the tenure of last years (1988-2018). The tools for measuring illiquidity measures Amihud (ILR) and the relative spread (RS) were used whereas Turnover (TUR) and the volume of trading (VTR) are used to measure liquidity. The sample for this study consists of firms’ stocks listed on the Karachi Stock Exchange for calculating the liquidity proxies and real economic activity, daily stocks prices data and returns, total number of shares and trading volume of each company. For measuring real economic activity the macro variables used are: Real GDP (RGDP), Real consumption (RC), Real investment (RI) and the unemployment rate (UnR). Hypotheses were developed according to the objective of the study. Standard linear and nonlinear models for the GDP calculation and regression model for developing the correlation between stock market liquidity and various economic factors. Jarque-Bera test, causality tests were applied to find correlation between stock market liquidity and real economic activity factors. The result of this study suggested that stock market liquidity has a significant effect on real economic activity in Karachi stock exchange market. Keywords: Stock market, liquidity, illiquidity, economic activity, capital, investment, DOI : 10.7176/EJBM/11-10-02 Publication date : April 30 th 2019
Highlights
Chapter 1: Introduction 1.1 BACKGROUND TO THE STUDY Stock markets are considered as key players in providing investors and financial institutions to mobilize their capital and provide an alternate market to buy and sell their stock
Many researchers are focused on investigating the stock market liquidity patterns that are impacted by the economic factors on a country level individually
Companies listed in Karachi Stock Exchange (KSE) are huge in terms of market capitalization, this is the reason that KSE was taken for this study in order to produce strong and widely applicable results
Summary
What is the relationship of stock market liquidity and economic activity? Question 2: What factors of stock market liquidity can act as leading indicator for economic activity and vice versa?. Kim (2013) conducted a study in Korea with an objective of showing a relationship between stock market liquidity and real economic activity He collected data during the time duration of 1995:2–2011:4. Taking Stock price as an indicator for economic activity, Irfan and Attari (2013) in their research conducted on both developing and developed countries during the tenure from Dec 1991 to Aug 2012.They applied the EGARCH (Exponential Generalized Autoregressive Conditional Heteroskedasticity) to analyze macroeconomic variable like inflation interest rate and GDP in Karachi Stock Exchange 100 Index to test. The statistical technique of standard linear and nonlinear models was applied on the data and the result indicated that between stock market illiquidity and future growth in GDP of U.K. is significant negative in relationship These results were derived after using the explanatory variables like term spreads, real money supply/divisia and shortterm interest rates. H0: There is a significant negative impact of stock market liquidity on real economic activity
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