Nepal Stock Exchange Research Articles

Broad Market Indices of Nepal Stock Exchange: Testing of Efficient Market Hypothesis

Broad Market Indices of Nepal Stock Exchange: Testing of Efficient Market Hypothesis

Determinants of Investors' Awareness of Online Trading in the Nepal Stock Market: An Empirical Assessment Using Binary Logit Model

Background: Online trading is becoming a prominent method of conducting stock exchanges through web platforms. While many regions worldwide have embraced online trading, its introduction in Nepal is relatively recent. The Nepalese stock market is considerably smaller than its neighboring nations, highlighting the significance of capital in a country's economic progress.
 Objective: The main objective of this paper is to investigate the factors that influence investor awareness of online trading within the Nepal Stock Exchange. The study focuses on investors who engage in stock market activities online, examining the variables of better online trading (dependent variable), facility in online trading, and investors' intention to invest (independent variables) in the context of online trading in Nepal.
 Methods: To achieve this objective, the study employed a non-probability convenience sampling technique, selecting 403 samples from the population of online investors. The research process incorporated three key instruments: expert opinions, structured questionnaires for surveys, and observational data collection.
 Results: The study's findings reveal that the majority of investors (83.4%) in Nepal possess a comprehensive awareness of online trading. Notably, the primary source of this awareness is brokers, accounting for 58% of investor knowledge dissemination.
 Conclusion: This research underscores the growing awareness of online trading within the Nepal stock exchange. Although Nepal's stock market is relatively diminutive compared to neighbouring nations, brokers play a vital role in educating investors about online trading. As investor interest in online trading rises, stakeholders and regulators must adapt to this evolving financial landscape.
 Implications: Understanding the factors that drive awareness and participation in online trading is critical for the development and growth of the financial sector in Nepal. Stakeholders must enhance educational efforts and facilitate investor-friendly policies further to bolster the online trading ecosystem in the country.
 Keywords: Online trading, Stock market, NEPSE, SEBON, Nepal
 JEL Classification: G24; G32

Effect of Behavioral Biases on Investment Decision Making in Nepalese Stock Market with the Mediating Role of Investors’ Sentiment

The current study explores the impact of behavioral biases such as market factors, herding behavior and awareness factors on investors’ decision-making on the Nepal Stock Exchange and also investigates the mediating role of investors’ sentiment in the relationship among the variables. To comprehend investor sentiment (IS) and how individual investors make decisions, this study introduced an innovative conceptual framework incorporating herding behavior, market dynamics, and awareness factors. A quantitative methodology was used to conduct the investigation, specifically employing a survey research design. This study made use of primary data that was collected by means of a structured questionnaire and gathered data from 408 individual investors. The convenience sample method was used, while structural equation modeling was used as a statistical tool to test hypothesis. It was determined how the market factor, herd behavior, and awareness affect investors' sentiment and decision-making by using structural equation modeling. The result showed that the most notable factors that affect investors’ sentiment were herding factors. Similarly, in the absence of a moderating variable, investors' sentiment is affected by all variables, including market factors, herding behavior, and awareness factors which have a significant impact on investors decision-making in the Nepal Stock Exchange. This study aims to assist individual investors in Nepal by guiding their investment choices and preventing sentiment-driven errors. It emphasizes the importance of understanding fellow investors' sentiment and suggests that awareness programs can enhance market understanding. Previous research has typically examined only a few factors at a time. This current study explores how various factors affecting investor sentiment—like market factors, herding behavior, and awareness—impact investment decision-making among individual investors in Nepal. Importantly, these factors have never been studied together in the context of how Nepalese individual investors make decisions about their investments.

Empirical Investigation of Abnormal Returns through Technical Analysis in the Nepalese Stock Market

This study comprehensively assesses the potential superiority of a technical trading strategy compared to the conventional buy and hold approach in the Nepalese stock market, where prior research is limited. It investigates the effectiveness of three widely recognized technical analysis indicators, both individually and in combination, using a 12-year historical dataset of 75 stocks, and 25.65-year NEPSE (Nepal Stock Exchange) index data. The back testing procedure evaluates the profitability and viability of the technical analysis strategy relative to buy and hold. The results show that, when factoring in trading-related costs, the technical trading strategy does not consistently outperform buy and hold. However, when trading fees are excluded, the technical strategy exhibits statistically significant outperformance. Future research can explore alternative technical rules and strategies to gain a more nuanced understanding of trading dynamics.

Testing Financial Constraint Hypothesis of Investment in NEPSE Listed Companies

This study aims to test financing constraints of Nepalese firms and its impact on investment behavior by controlling the accelerator effect. It divides the firms into Financially Constrained (FC) and Unconstrained (UC) group using discriminant analysis and uses Econometric Model to analyze investment cashflow sensitivities (ICFS) of firms. The data comprised the accounting observations (n=256) obtained from the annual reports of 16 non-financial companies listed in Nepal Stock Exchange Ltd. Results show that financially constrained firm exhibit higher cashflow sensitivity indicating significant influence of financing constraints on Nepalese firm's investment behavior. It documents the evidence of financial market inefficiency, urging for policy prescriptions to address these constraints and spur investment and growth.

Examining the Impact of Dividends on Share Prices: Evidence from Microfinance Companies in Nepal

The objective of this empirical study is to investigate how dividends affect stock prices. The antecedent variables are the price-to-earnings ratio, dividend payout ratio, dividend per share, and earnings per share. The consequent variable is the share price of microfinance companies. Profitability (return on equity) acts as a mediator between the antecedent and consequent variables. Microfinance was chosen on the basis of its performance on the Nepal stock exchange, and information was gathered from companies listed in the NEPSE between 2018 and 2022. Purposive or judgmental sampling was utilized to identify the ten microfinance companies that served as study samples. The research employs descriptive statistics, correlation, and regression path analysis models to investigate the mediating role. The findings revealed that the direct and total effects of the dividend payout ratio and earnings per share have insignificant impacts on the share price. Furthermore, the indirect effect of antecedent variables has an insignificant impact on share price through return on equity. Additionally, this study advises investors to use the information not only as a way to profit but also as a tool for assessing companies from an investment standpoint. Moreover, management must determine the dividend payout ratio to enhance shareholder wealth.

Impact of Financial Performance on Stock Price Volatility: A Case of Nepalese Microfinance Companies

With the explanatory variables of ROE, ROA, D/P ratio, P/E ratio, and BVPS, this study investigates the impact of financial performance on the stock price instability of microfinance companies listed on the Nepal Stock Exchange (NEPSE). The age and size of microfinance companies have been used as control variables. It has also observed the investor's behavior toward these variables. The study follows a quantitative approach with descriptive, causal-comparative, and survey research design. Multiple regression analysis is used to examine the causal relation between stock price volatility and the profitability of microfinance companies. This study has analyzed the annual report of 31 microfinance companies with 183 observations and 121 responses to a questionnaire received from the investors. According to this study, microfinance organizations' capacity to produce profits has a considerable impact on share price volatility. The survey result of the study reveals that the investors of microfinance companies are more sensible towards earning ability and past performance of the companies. The results of this investigation may be beneficial to the investors of microfinance companies to select the companies for investment. Acknowledging the limitation of data used in this study, further study can be conducted by taking other industries like banking, insurance, hotel, and manufacturing companies listed in the NEPSE. Besides this, a behavioral study about investors’ responses toward market factors can be conducted by taking a large sample of investors.

Dynamic Relationship of the Stock Index with the Trading Volume of the Nepal Stock Exchange: An Empirical Analysis

Knowledge about the linkage between the volume and the index of the stock is crucial for market participants and investors to make informed decisions in trading and forecasting the stock market, as understanding this fundamental Linkage enhances investment decisions. This study relies on time series data to objectively explore the dynamic linkage between the index of the stock and the amount of trade on the Nepal Stock Exchange from mid December 2018 to mid-January 2023. The outcome of the Autoregressive Distributed Lag (ARDL) model reflects a long- and short-term substantial positive association between the volume of the trade and returns from the stock in the current timeframe. This implies that a change in volume has both a long- and short-term, small but positive effect on the returns from the stock. Conversely, the lagged-period stock index negatively and significantly impacts the present index of the stock. However, the conclusions drawn from the Granger causality test demonstrate no Granger causation from the volume of the trade to return and vice versa, implying that both variables do not affect each other.

Portfolio Optimization Using ANNs and Mean-Semi Variance Markowitz Model: A Comparative Study of South Asian Economies

This study uses many portfolio approaches to optimize mean semi-variance portfolios using artificial neural networks for South Asian investors. These methods include the mean-semi variance strategy, minimal variance approach, limited portfolios with transaction costs and turnover constraints, constrained portfolios with risk and return diversification limits, and the equally weighted approach. These portfolio strategies are analysed using the excess Sharpe ratio and the Information Ratio for financial efficiency and diversity, respectively, and validated using the 130/30 portfolio strategy. The Pakistan Stock Exchange (PSX), Bombay Stock Exchange (BSE), Dhaka Stock Exchange (DSE), Columbo Stock Exchange (CSE), and Nepal Stock Exchange (NEPSE) supply daily data for empirical research. We use a large data collection from 2017 to 2021. The study found that ANN-generated estimators using a mean semi-variance optimization strategy outperformed alternative portfolio optimization methods in South Asian markets. The research reveals that ANN-based returns outperform correlation statistics, descriptive analysis, and mean square prediction error (MPSE). The study suggests utilizing naive diversification as a benchmark for other portfolio optimization methodologies.

Social Biases and Equity Investment Decisions of Individual Investors: Behavior Finance Perspective

Individual investors may not always pose a rational decision on stock market and heavily guided by their behavioral and social biases. This study is delineated to examine the role of social factors in the decision-making process of individual investors. This study is based on quantitative research approach and utilized a 5-points Likert type closed-end structured questionnaire survey to collect the data from 269 individuals, invested in the firms listed at Nepal Stock Exchange (NEPSE). This study utilized reliability analysis, descriptive statistics, Pearson correlation coefficient and ordinary least square (OLS) method. Evidence indicates that herding, social interaction and media effect shows the positive influences on equity investment decision process of the investors. Finally, this study justified that social biases play the significant role for equity investment decisions of the individual investors through excessive follow the humor of the market place, over or under reaction of the information about securities, follow the suggestions and recommendations of peers, friends, family members and neighbors along with highly depend upon news, social medias and information of so-called experts of capital market that leads to investment mistakes. Hence, investors should strongly follow the proper information about stock and market, utilize their own knowledge about information processing and analysis, and try to reduce the biases while making decisions through information analysis and processing that may downsize the irrational decisions.

Impact of Strategic Management Accounting Practices on Financial Performance of Nepalese Manufacturing Firms

This study was carried out to examine the relationship between financial performance and the application of management accounting practices in the Nepalese manufacturing firms. The study adopted the survey research design. The population of the study consists of all listed manufacturing companies under Nepal stock exchange. The study used simple random sampling. Four manufacturing firms were randomly selected for the study. Data for the study were obtained through the administration of a self-designed questionnaire to managers or accountants of the sampled firms through mail survey. Regression and t-test were used to test the hypotheses postulated for the study. The study showed that application of management accounting tools has a positive relationship with financial performance of companies’ survey. The study also found a significant difference in effectiveness of decision making between application of management accounting tools and traditional management accounting techniques and concludes that implementation of strategic management accounting practice is necessary to enhance organizational performance of the firm. The study therefore recommends that manufacturing companies, especially the ones listed and still tradable under NEPSE, put in place appropriate measures to apply modern management accounting tools called strategic management accounting practices to ensure efficient and realistic decision-making process that will enhance financial performance.

Cross Section of Stock Returns in Nepal

This paper investigates the significant firm-specific factors that explain the variation in cross section returns of non-financial firms listed in Nepal Stock Exchange (NEPSE). Firm size, book to market equity ratio, debt equity ratio, earning yield, cash flow yield and dividend yield have been tested to find out explanatory power on explaining variation in cross-section returns of non-financial firms. A total of 14non-financial firms has been selected for this research. Among them, 6 were hydropower companies, 3 were manufacturing companies, 2 were tourism companies and 1 was from another sector. Judgmental sampling design is implemented for sampling procedure. Sampling frame and daily stock prices are obtained from official website of NEPSE. Firm-specific accounting data is collected from annual reports of listed companies. Descriptive, correlational, and analytical research designs are used to explore the research question. A multiple linear regression model was used for data analysis and it was found that only cash flow yield and dividend yield are found to be significant predictors explaining the variation in cross-section returns of non-financial firms listed in NEPSE. Other variables such as firm size, book to market equity ratio, debt equity ratio and earning yield are found to be insignificant variables to explain variation in cross-section returns

Systematic Risk and Cross Section of Equity Returns: Evidence from Nepalese Insurance Sector

This research analyzes the impact of firm-specific characteristics on the cross-section of equity returns of insurance companies in Nepal. For this purpose, the study used 22 insurance companies listed in the Nepal Stock Exchange (NEPSE), comprising seven life and 15 non-life insurance companies. To make a balanced panel, those companies are selected as samples that have completed at least seven years of operation until the end of 2021 and are listed in NEPSE. The secondary data from 2015 to 2021 is analyzed using panel regression models. The Breusch-Pagan and Hausman tests are used to select the best panel model, and the random effect model is the best estimation model. The study reveals that systematic risk associated with the stock can explain the stock’s risk premium, proving that the notion of CAPM holds in the context of Nepal as stock beta is positive and significant in all tested models. Similarly, the book-to-market ratio is found to be negatively affecting the stock return. On the other hand, earning yield positively affects the stock return, and firm size negatively impacts equity returns. However, the investment rate and leverage are insignificant to affect equity returns. Therefore, stock investors are recommended to select alternatives based on systematic risk, earnings yield, and BM ratio. The findings also suggest to corporate policymakers that merger and acquisition cannot maximize shareholders’ wealth because it only increases paid-up capital, and this leads to decreased equity returns due to an increase in the book-to-market ratio and size of the firm.

Demographic Factors and Behavioral Biases of Individual Investors in Nepalese Capital Market

This study aimed to analyze the relationship between demographic factors (age, gender, income, and occupation) and behavioral biases (overconfidence bias, disposition effect, and herding bias) while making share trading decisions in the Nepalese capital market. The research was conducted by distributing questionnaires to active investors with trading accounts in the Nepal Stock Exchange (NEPSE). The data was gathered from primary sources and used for statistical analysis through ANOVA and Chi-square.
 The results of the analysis showed that there is a difference in overconfidence bias among different levels of income, age, and occupation, while a difference in herding bias among occupation and gender, whereas no difference is seen in the disposition effect among the demographic variables. This finding is consistent with other studies conducted on the behavioral biases of individual investors in the stock market.
 Understanding the factors that influence investment decisions is crucial for investors, financial advisors, and policymakers. This study provides insights into the relationship between demographic factors and behavioral biases while making share trading decisions in the Nepalese capital market. The findings of this study can be used to develop effective investment strategies and improve investment decision-making.

Accounting information and stock price changes in Nepalese hydropower companies

The study aimed to examine the relationship between accounting information (earnings per share, dividend per share and book value per share) on stock price changes (volatility) in Nepalese hydro power companies. It examined the impact of dividend per share, earnings per share and book value per share on stock price changes. Out of the 51 hydropower companies listed in Nepal Stock Exchange, Butwal Power Company Limited (BPC) and Chilime Hydro Power Company Limited (CHPC) were randomly selected for the study. The study period was covered 2073/2074 to 2078/2079 and data collected through the annual reports as well as data based on the Nepal Stock Exchange. Market value per share (MVPS) was taken as dependent variable and earnings per share (EPS), dividend per share (DPS) and book value per share (BVPS) as independent variables. Multiple regression analyses was used to identify the impact of accounting information on share price changes. A positive relation was found between EPS and MVPS in both companies. However DPS and BVPS showed mixed relationship (negative and positive) with MVPS of BPC and CHPC. The EPS of BPC found positive impact on MVPS. However DPS revealed negative impact on MVPS of both companies.

Comparative Risk Return Analysis of Nepal Stock Market with Selected Banking Stocks in Nepal

The Nepalese stock market, specifically concentrating on three commercial banks listed on the Nepal Stock Exchange Limited. The paper aims to analyze the risk and return associated with investing in common stocks in the Nepalese stock market, focusing on three commercial banks. Secondary data is gathered from various sources, including the NEPSE website, prior studies, publications by the NRB (Nepal Rastra Bank), commercial banks' websites, and the SEBON (Securities Board of Nepal) website. The paper employs scientific analysis techniques on quantitative data. Different methods, such as correlation, regression, and descriptive statistics, are used to test hypotheses and investigate the risk-return trade-off in the Nepalese stock markets. The analysis is based on the results of the sample banks' risk and return analysis, utilizing historical data from their most recent five fiscal years, spanning from FY-2017/18 to FY-2021/22. The abstract concludes that the three commercial banks examined in the study are characterized by high risk and variable rates of return.

Stock Market Performance during Covid-19 Lockdown : A Descriptive Analysis of Nepal Stock Exchange

This article aims to investigate how the Nepalese stock market behaved during the government-imposed closure to combat COVID 19. In order to analyze the secondary data from March 2020 to September 2021, the time period was divided into three parts: first part is the first lockdown period, second part is the time following the first lockdown and the time before the second lockdown, and the third part is the second lockdown period. The Nepse Index was used as the dependent variable in an OLS regression, while the sub-indices were used as the independent variables. To reduce the issue of heteroscedasticity, all the study variables were transformed into their natural logarithmic forms. Since the study's variables were time series data, the stationarity test was also carried out to produce reliable OLS regression findings. The findings show that the lockdown imposed by the government owing to COVID 19 caused a sharp decline in the share price of all indices on the Nepalese stock market. However, as soon as the lockdown was released, the market began to recover, and the share values began to rise significantly. The findings show that banking and non-life insurance have a significant positive impact on Nepse performance over all three periods, even if the impact of finance was never felt during the study period. Using the study's informative data, investors can manage their share portfolio in unexpected and bad circumstances.

Technical Analysis and Efficient Market Hypothesis in the Nepal Stock Exchange (NEPSE)

Stock exchange is a trading platform for the buyer and seller of securities. The stock exchange acts as a “barometer” of the health of the economy or considered a mirror of economy. If the market as a whole expects economic prospects to improve, share price will rise, and vice versa. The history of securities market began in Nepal with the flotation of shares by Biratnagar Jute Mills Ltd and Nepal Bank Ltd in 1937 A.D. Introduction of the company Act in 1964 A.D., and the establishment of Securities Exchange Center Ltd in 1976 was other significant developments relating to capital markets in Nepal. At present there is only one stock exchange in Nepal, which is also called secondary market i.e. Nepal Stock Exchange (NEPSE). Nowadays, Nepal’s stock market has become major area of investments. Basically, there are two approaches of analyzing the securities: fundamental analysis and technical analysis. Beside these there is another technique for analyzing the share price behavior that is called efficient market hypothesis. Each price of an individual share is independent of the previous price. The price of a moment does not affect the price of another moment. This type of moment of prices is called random walk of prices.

Performance Evaluation of Technical Analysis in the Nepalese Stock Market: Implications for Investment Strategies

Purpose: This study aims to examine the performance of five widely used technical indicators on Nepal Stock Exchange (NEPSE) indexes. Specifically, the study evaluates indicators such as the simple moving average, moving average convergence and divergence, relative strength index, stochastic oscillator, and Bollinger Band. Design/methodology/approach: The study utilizes a descriptive and quantitative research design. Daily closing index data of NEPSE and its six sub-indices are analyzed for a substantial period, ranging from 1st September 2012 to 31st August 2022. The performance of the technical indicators is examined through modeling, backtesting, and statistical analysis. The technical trading rules of each indicator are incorporated into the modeling process, and the results are analyzed using different performance metrics. Furthermore, the predictability of the indicators is tested through standard statistical analysis and bootstrap techniques utilizing a random walk model. Findings: The results of the study reveal that the technical strategies, as represented by the analyzed indicators, generally support the effectiveness of technical analysis in the NEPSE. However, the relative strength index stands out as an exception, generating negative returns. The second stage of the analysis indicates that the simple moving average, relative strength, and Bollinger band fail to generate significant returns in certain indices. The findings from the bootstrap techniques further contradict the forecasting ability of technical strategies in the NEPSE, raising questions about their real performance in the Nepalese stock market. Practical Implications: This research provides valuable insights for investors, traders, and market participants in understanding the nuances and limitations of technical analysis in the context of the NEPSE. The findings suggest that technical indicators, notably the relative strength index, should be interpreted cautiously and that investing decisions should take into account additional factors. The study contributes to the ongoing discussion on the effectiveness of technical analysis in the Nepalese stock market, assisting practitioners to make informed decisions and better understand market dynamics.

Management Accounting Practices in Nepalese Manufacturing Companies

The general objective of this study was to explore the uses of management accounting practices in Nepalese manufacturing companies. This study adopted a descriptive survey design. The population of the study consists of all listed manufacturing companies under Nepal stock exchange. The study used simple random sampling. Four manufacturing firms were randomly selected for the study. The study therefore involved 5 manufacturing companies located in Kathmandu. The study collected primary data from the respondents. The data collected was both quantitative and qualitative. Analysis was done using Statistical Package for Social Sciences (SPSS), allowing the researcher to present the information in form of tables and figures. This study found that the creation and enhancement of awareness among firms of the importance of information for decision making practices as this is the most highly used management accounting practice amongst the Nepalese manufacturing companies. This study concludes that information for decision making practices is the most highly used management accounting practice amongst the manufacturing companies in Nepal, followed by strategic analysis, budgeting, performance evaluation, costing, size and leverage respectively.