Market Depth and Risk Return Analysis of Dhaka Stock Exchange: An Empirical Test of Market Efficiency

TL;DR

This study empirically tests the weak-form efficiency of the Dhaka Stock Exchange by analyzing market risk, return, and liquidity, revealing low returns, weak risk-return relationships, and limited market liquidity.

Contribution

It provides empirical evidence on market efficiency, risk-return dynamics, and liquidity issues specific to the Dhaka Stock Exchange, which were previously underexplored.

Findings

Market returns are very low or sometimes negative.

CAPM relationship is not observed in DSE.

Market liquidity is limited, affecting investor interest.

Abstract

It is customary that when security prices fully reflect all available information, the markets for those securities are said to be efficient. And if markets are inefficient, investors can use available information ignored by the market to earn abnormally high returns on their investments. In this context this paper tries to find evidence supporting the reality of weak-form efficiency of the Dhaka Stock Exchange (DSE) by examining the issues of market risk-return relationship and market depth or liquidity for DSE. The study uses a data set of daily market index and returns for the period of 1994 to 2005 and weekly market capital turnover in proportion of total market capital for the period of 1994 to 2005. The paper also looks about the market risk (systemic risk) and return where it is found that market rate of return of DSE is very low or sometimes negative. Eventually Capital Asset Pricing Model (CAPM), which envisages the relationship between risk and the expected rate of return on a risky security, is found unrelated in DSE market. As proper risk-return relationships of the market is seems to be deficient in DSE and the market is not liquid, interest of the available investors are bring into being very insignificant. All these issues are very noteworthy to the security analysts, investors and security exchange regulatory bodies in their policy making decisions to progress the market condition.