AN OVERVIEW OF THE PAKISTAN STOCK MARKET

Long-term investors can expect profitable returns from the Pakistan Stock Exchange. The KSE 100 Index stocks at PSX offered excellent annual average return of 10.58% in the last 10 years to investors. Investors can purchase a range of blue chip stocks, bonds, exchange-traded funds (ETFs), and mutual funds on the Pakistan Stock Exchange. The Securities and Exchange Commission of Pakistan (SECP) regulates stock exchange in Pakistan. Currently there are more than 522 companies listed on PSX with a Market Capitalization of more than PKR 7.2 Trillion.
The economies of the world hit hard by the outbreak of the COVID-19 and Pakistan is not an exception. This paper aims to investigate the impact of COVID-19 on EMH in Pakistan. In Pakistan, the first COVID case appeared on February 25, 2020 and three weeks later the government imposed a strict lock down. The Pakistani stock market posted record losses due to the pandemic, with the reduction of 28%. PKR also depreciated by about 14% to 16% on a yearly basis against the USD during March and April 2020, respectively.
To lessen the impact of pandemic, the Government of Pakistan provided a package of Rs. 1.2 trillion and Supplementary Grant of Rs. 100 billion for the “Residual/Emergency Relief Fund” (in relation to provision Of funds). In addition, the State Bank of Pakistan (SBP) took several measures to combat the damage to the economy caused by the pandemic.

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Figure 1:

The following is the list of countries according to the market capitalization of all domestic companies listed in the country, according to data from the World Bank. Market Capitalization is the market value of a publicly traded company’s outstanding shares.

Sr. Country T.M.C (mil. USD) T.M.C % No. of listed Companies Year
1 United States 49,653,000 194.5 4266 2023
4 India 4,260,000 120 5270 2023
31 UAE 294,832 58.6 130 2020
44 Bangladesh 89,774 27.7 628 2020
50 Greece 50,986 26.9 171 2020
54 Pakistan 32,394 15.2 557 2011
64 Oman 16,481 22.4 111 2020
72 Lebanon 6,703 20.1 10 2020
77 Cyprus 4,693 19.7 92 2020
Source: Wikipedia

According to this table, Sr. is the world ranking, T.M.C stands for Total Market Capitalization in million USD, T.M.C % is the percentage of GDP in Total Market Capitalization.
United States of America stands first in the World Ranking. The ranking is listed from top to bottom. In which Pakistan stands 54 with the total market capitalization of 32,394 (million USD), having 15.2% GDP . There are total 554 domestic companies listed in 2011.

 

LITERATURE REVIEW:
The stock prices follows a random walk is closely associated with the Efficient Market Hypothesis (EMH). (Kendall 1953) was among the first to introduce the concept in finance literature, examining British stocks and commodities to reveal their seemingly random behavior. (Fama 1965) countered the effectiveness of technical analysis for long-term price prediction. (Lo and MacKinley 1999) identified short-run autocorrelation in stock prices, while (Lo, Mamaysky, and Wang (2000) suggested advanced statistical techniques could offer some predictive power. (Malikiel 2003) and (Cuthbertson and Nitzsche 2004) further supported the idea that abnormal profits in stock prices over the long term are not achievable.
There were over 50 articles studied during the course of the research all with the following keywords:
⦁ Efficient Market Hypothesis (EMH)
⦁ COVID-19
⦁ Pakistan Stock Exchange (PSX)
⦁ Random Walk Theory
⦁ Stock Trend

Key Terms Explanation:
The key terms used in the articles are explained as follows:

⦁ Efficient Market Hypothesis:
One of the conventional and commonly accepted assumption in the financial world is the Efficient Market Hypothesis (Fama, 1970).
The theory of efficient market hypothesis was developed a long time back by (Bachelier 1900) and the empirical research of (Cowles 1933).
The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behavioral elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable (Malkiel, 2003).
There are three levels of EMH; weak form, semi-strong form and strong form. The weak-form version of EMH postulates that financial asset prices reflect all information contained in the past prices. Semi-strong version asserts that asset prices apart from reflecting all information content of historical prices also reflect all publicly available information. Strong-form version of EMH postulates that in addition to information on past prices and publicly available information, stock prices also reflect inside information.

ABSTRACT:
The paper examines the impact of COVID-19 on Pakistan Stock Exchange (PSX). Stock Market was impacted by the COVID-19 pandemic. The behavior and expectations of Investors were shaken badly. This paper evaluated the PSX for evidence of a weak-form Efficient Market Hypothesis (EMH) for the pandemic period. The study used low-frequency data (monthly) from January 2020 to February 2022 for its analysis. The Security Exchange Commission of Pakistan (SECP) regulates the PSX. It was the second time in Pakistan’s history, after 1951-1952, that it experienced a negative GDP growth rate; -0.4% for the fiscal year 2020.

Purpose:
This research explores how the COVID-19 pandemic has influenced the sentiments of investors, their behaviors and the decisions they made in the Pakistan Stock Exchange (PSX).

INTRODUCTION:
Market efficiency is a relatively broad term and is one topic in finance literature. Fama (1970) introduced the Efficient Market Hypothesis (EMH), which states that in an efficient market, prices accurately represent all available information.
There are three levels of EMH; weak-form, semi-strong form, and strong form. The weak-form version of EMH postulates that financial asset prices reflect all information contained in the past prices. Semi-strong version asserts that asset prices apart from reflecting all information content of historical prices also reflect all publicly available information. Strong-form version of EMH postulates that in addition to information on past prices and publicly available information, stock prices also reflect inside information.
This study paper’s main goal is to investigate the EMH’s weak-form (WF-EMH). This paper aims to investigate the impact of COVID-19 of EMH in Pakistan by considering other major factors that influence the performance of stock markets such as interest rate and exchange rate.

Questions for the Study:
This work was based on a secondary research sources hence discarding the use of questionnaires. Secondary data is the one obtained from publications. Publications are released by companies, government institution, world bank and IMF sources. It may be published monthly, quarterly or yearly and even daily.
The following questions were studied besides the secondary data:
⦁ To what extent do you understand the concept of the weak form of the Efficient Market Hypothesis (EMH)?
⦁ On a scale of 1-10, how would you evaluate the performance of the Pakistan stock exchange during the pandemic in terms of efficiency?
⦁ How would you assess the Pakistan stock exchange’s accessibility and usability of information during the pandemic?
⦁ Based on your understanding, do you believe the Pakistan Stock Exchange (PSX) follows the weak form of the EMH?
⦁ Have you noticed any significant changes in the stock price trends in the PSX since the onset of the pandemic?
⦁ How would you assess the impact of the pandemic-induced market volatility on the weak form EMH in the PSX?
⦁ In your opinion, has the pandemic influenced the predictability of future prices based on past prices in the PSX?
⦁ Reflecting on the pandemic period, has the PSX displayed random walk behavior or patterns that could be identified and exploited?
⦁ Has the widespread dissemination of information during the pandemic impacted the weak form of EMH in the PSX?
⦁ Have you noticed any increased effectiveness of technical analysis during the pandemic period?
⦁ Do you believe the pandemic affected the efficiency of the PSX in reflecting all past publicly available information?
⦁ Looking forward, how do you believe the post-pandemic period might affect the application of the weak form of the EMH in the PSX?

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