Dynamics of Mutual Funds in Relation to Stock Market: A Vector Autoregressive Causality Analysis

Authors

  • Md. Shahadath Hossain United International University, Dhaka 1209, Bangladesh
  • A.B.M. Munibur Rahman School of Management, Wuhan University of Technology, Wuhan 430070, P.R. China
  • Md. Salah Uddin Rajib School of Management, Wuhan University of Technology, Wuhan 430070, P.R. China

Abstract

In Bangladesh, primary and secondary mutual fund markets behave in a completely different way, where initial public offering (IPO) investors of mutual funds earn more than 250 percent rerun, whereas secondary market investors cannot even manage to cover the opportunity cost of their investment. There are few other abnormalities present in this market – unlike everywhere in the world, most of the mutual funds are closed-end (92 percent) and closed-end mutual funds are barred to issue bonus or right shares. A total of 714 day’s observations, from January 2008 to December 2010, of four variables– DSE (Dhaka Stock Exchange) general index return, DSE general index turnover, mutual funds’ return and mutual funds’ turnover– are utilized. Stationarity of the variables are tested with Augmented Dickey-Fuller (ADF) unit root test and found that variables are in different order of integration. Long-term equilibrium relationships among the variables are tested with Johansen cointegration and it is found that DSE general index return and mutual funds’ return are cointegrated. Toda-Yamamoto (TY) version of granger non-causality test is employed and bidirectional causality is found moving from DSE (Dhaka Stock Exchange) general index turnover to DSE general index return, whereas unidirectional causality is found moving from mutual fund’s return to DSE general index return, mutual funds’ return to mutual funds turnover, and DSE general index turnover to mutual funds turnover. This finding helps to conclude that equity shares’ demand drives the mutual funds demand but even higher demand of mutual funds fails to raise its own price unless underlying value of the mutual funds changes.

Keywords: Mutual Fund; Dhaka Stock Exchange; Vector Auto Regressive; Augmented Dickey-Fuller; Cointegration; Stationarity

JEL Classifications: G1; G11

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Author Biographies

Md. Shahadath Hossain, United International University, Dhaka 1209, Bangladesh

Md. Shahadath Hossain is a student of Master of Science in Economics in United International University, Bangladesh. He completed his graduation with dual major in Finance and Economics from the United International University. His research interests are on Corporate Finance, Security market analysis, Insurance & Risk mitigation, Macroeconomics & Monetary policy, Health economics, Environmental Economics, and Microfinance. His Contact Email is shahadath08@gmail.com . 

A.B.M. Munibur Rahman, School of Management, Wuhan University of Technology, Wuhan 430070, P.R. China

A.B.M. Munibur Rahman is a MBA research fellow at school of management of Wuhan University of Technology of P.R. China. He has graduated in Finance from the United International University, Dhaka, Bangladesh. My research area includes corporation finance, security market analysis and forecasting, financial & credit risk management, investment and budgeting, and market valuation. contact address is munib_30@yahoo.com.

Md. Salah Uddin Rajib, School of Management, Wuhan University of Technology, Wuhan 430070, P.R. China

Md. Salah Uddin Rajib is PhD research fellow at School of Management of Wuhan University of Technology. His research orientation is Forecast, Decision making and Information systems. His contact address is rajibais71@gmail.com

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Published

2012-12-18

How to Cite

Hossain, M. S., Rahman, A. M., & Rajib, M. S. U. (2012). Dynamics of Mutual Funds in Relation to Stock Market: A Vector Autoregressive Causality Analysis. International Journal of Economics and Financial Issues, 3(1), 191–201. Retrieved from https://www.econjournals.com/index.php/ijefi/article/view/341

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