Capital Market of Bangladesh: Volatility in the Dhaka Stock Exchange (DSE) and Role of Regulators

Abstract

Over the last few years, the capital market of Bangladesh has witnessed a haughty growth which is not in line of
development in the real sector of the economy. Although, the Securities and Exchange Commission (SEC) of
Bangladesh has tried to correct the irregular behavior observed in the market, very often it is argued that lack of
proper and firm decisions from the regulator’s side has contributed to make the market more unstable rather than
to reduce it. The paper attempts to identify the casual relationship between the observed volatility in the
country’s major bourses namely the Dhaka Stock Exchange (DSE) and the regulatory decisions taken by the
SEC empirically. Using Vector Auto-regressive (VAR), statistically highly significant relationship was found
between decisions taken by the regulatory authority and market volatility, although the direction of causality is in
reverse order than theoretically and empirically expected. Again, though the number of decisions taken by the
SEC immediately, with longer time the response was in opposite direction than expected.