measuring mse with mbi10 stock index - final.2

8/2/2019 Measuring MSE With MBI10 Stock Index - FINAL.2

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POSTGRADUATE STUDIES IN

BUSINESS ECONOMICS

SEMINARY WORKS IN MODULE:

ECONOMETRICS

Title:Measuring MSE volatility with MBI10 stock index

Professor:

Student:

M-r Marjan Nikolov Igor Tanturovski

Skopje, April 2009


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Measuring MSE volatility with MBI10 stock index

CONTENT:

Abstract 3

Introduction 4

Stock Market in Macedonia: An Overview 6

Methodology 7

Results and Discussion 13

Summary and Conclusion 15

References 16

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1. Abstract:

This paper studies the Macedonian stock exchange through volatility of MBI10 stock index,

trading volumes and nominal net wages on the estimated period. The aim of this study is to

identify the determination of net wages and trading volume on MBI10 index. MBI10 index is

composition of the ten most liquid companies in Macedonia and its movement is essential

for the Macedonian stock exchange. Using the event study methodology, I found out that

voluntary earnings disclosures exhibit significant stock market reactions around news

releases. I also noticed a significant decrease and increase in trading volumes when good and

bad news are released. Moreover, investors react more aggressively to bad news suggesting

that bad news related to firms performance are more credible. Panel-data regression

analyses were also performed to examine both categories. This result suggests that earning

forecasts are subject to earning manipulation and less credible, then for the market.

As dependent variable is MBI10 index and as explanatory variable is nominal net wages and

trading volume per month. The aim of this study is to identify the determination of net wages

on MBI10 index for 2008 and then for period from 2004 to 2008, afterwards I will include

and compare the trading volume on MSE for the same two periods.

This study demonstrates that in terms of economic crisis, the MBI10 stock index is

influenced by other variables which are not indicated in this research, but in longer period of

time cycles of movement of MBI10 index is relatively proper.

Keywords: stock market volatility,stock index, trading volumes and nominal net wages,

market liquidity, and information content

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2. Introduction

A common problem plaguing the low and slow growth of small developing economies is the

shallow financial sector. Financial markets play an important role in the process of economic

growth and development by facilitating savings and channeling funds from savers to

investors. While there have been numerous attempts to develop the financial sector, small

economies are also facing the problem of high volatility in numerous fronts including

volatility of its financial sector.

Volatility may impair the smooth functioning of the financial system and adversely affect

economic performance. Similarly, stock market volatility also has a number of negative

implications.

One of the ways in which it affects the economy is through its effect on consumer spending

(Campbell, 1996; Starr-McCluer, 1998; Ludvigson and Steindel 1999 and Poterba 2000).

The impact of stock market volatility on consumer spending is related via the wealth effect.

Increased wealth will drive up consumer spending. However, a fall in stock market will

weaken consumer confidence and thus drive down consumer spending. Stock market

volatility may also affect business investment (Zuliu, 1995) and economic growth directly(Levine and Zervos, 1996 and Arestis et al 2001). A rise in stock market volatility can be

interpreted as a rise in risk of equity investment and thus a shift of funds to less risky assets.

This move could lead to a rise in cost of funds to firms and thus new firms might bear this

effect as investors will turn to purchase of stock in larger, well known firms.

While there is a general consensus on what constitutes stock market volatility and, to a lesser

extent, on how to measure it, there is far less agreement on the causes of changes in stock

market volatility. Some economists see the causes of volatility in the arrival of new,

unanticipated information that alters expected returns on a stock (Engle and Ng, 1993). Thus,

changes in market volatility would merely reflect changes in the local or global economic

environment. Others claim that volatility is caused mainly by changes in trading volume,

practices or patterns, which in turn are driven by factors such as modifications in

macroeconomic policies, shifts in investor tolerance of risk and increased uncertainty.

The degree of stock market volatility can help forecasters predict the path of an economys

growth and the structure of volatility can imply that investors now need to hold more stocks

in their portfolio to achieve diversification (Krainer, J, 2002:1).

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This case is more serious for small developing economies like Macedonia, with attempt to

broaden their financial sector by developing their stock market. Unlike mature stock markets

of advanced economies, the stock markets of less developed economies like Macedonia

began to develop rapidly only in the last two decades and are sensitive to factors such as

changes in the levels of economic activities, changes in the political and international

economic environment and also related to the changes in the macro economic variables.

Therefore, in this paper, we examine if the Macedonian Stock market is volatile and if so,

then what is the role of nominal net wages being one of the most important macroeconomic

variables on the volatility of the stock index.

This article benefits from developments in the measurement of volatility through

econometric techniques. Here, the Least squares method is used to estimate the conditional

variance of Macedonias stock index from January 2004 to December 2008. This method

allows for an objective determination of the presence of volatility. The result of estimates of

stock index volatility is then related to changes in the net wages and trading volume.

The second section of the paper provides an overview of the Macedonian stock market. The

third section of the paper provides an exposition of the methodology used in this study. The

fourth section provides a summary of the results and its discussion. The last section provides

a summary and conclusion.

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3. Stock Market in Macedonia: An Overview

Macedonias Stock Exchange has existed since 1995, with a small fund of one million

Deutsche marks. The founders were 13 banks, three insurance companies and three saving

houses. The call market was introduced on 28 March 1996, initially being summoned twice

a week. The market operates through market officials verbally calling for orders on each

particular security and the brokers then shout their orders. Since 2004 the market has been

summoned four times a week, i.e. Monday to Thursday. The stock market has a key role to

play in promoting Macedonia as a financial service centre of repute1. It has become quite

obvious that having a reputable domestic stock exchange is one of the major attributes that

sophisticated financial services players look for when making their investment decisions, asthis increases efficiency in trading. The stock exchange provides a market for motivated

buyers and sellers of shares. This improves the convenience in the trading of shares and it

also encourages local investment, as the investors have confidence in putting their savings in

institutions like this. The government has also assisted in the development of the market by

exempting tax on dividends for listed companies and has commenced the float of shares in

government owned enterprises.

In March 2001, the electronic trading on MSE was introduced and in the summer of the same

year the Macedonian stock index (MBI) was established composed by five most liquid

shares.

The MSE is not a highly liquid market though liquidity is improving over time. In absolute

terms, the stock exchange has made some progress. The number of listed companies has

grown from five in 2001 to ten in 2005, the market capitalization was increased and MBI

was extended to MBI10 index. In order to bring more development to the stock market there

are lots of challenges ahead for the stock exchange such as increasing public awareness

about the operation of the MSE, re - looking at the stringency of listing rules, finding ways to

encourage more listings and staff training to improve the operations of the MSE.

4. Methodology

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The data needed for this research were provided by the State Statistical Office of RM and the

Macedonian Stock exchange. They consist of monthly time series on the MBI10 index,

nominal net average wage and the trading volume for the period 2004 - 2008.Analysis of the values of the nominal net average wage show that they move consistently

upwards during the examined sample period. As for the values of the MBI10 index, bigger

oscillations are evident mostly in the last years of the sample period.

The Chart 1 and Chart 2 below give graphical presentation of the MBI10 index for 2008 and

from 2004 2008 respectively.

MBI10 index in 2008

0

1000

2000

3000

4000

5000

6000

7000

8000

1 2 3 4 5 6 7 8 9 10 11 12

Series1

Source MSE Chart 1

Chart 1 indicates that in 2008 MBI10 index constantly decreases and from the beginning of

the year it is reduced almost twice folds.

MBI 10 2004-2008

0

2000

4000

6000

8000

10000

12000

1 4 7 10 13 16 19 2 2 25 28 31 34 37 40 43 46 49 52 55 58

2004-2008

Source: MSE Chart 2

Chart 2 indicates that 2004 and 2005 were constant but 2006 shows wakening and 2007 wasthe best year for the MBI10 index.

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The Chart 3 and Chart 4 below give graphical presentation of the nominal average net wages

for 2008 and from 2004 to 2008 respectively.

Nominal average net wages 2008

13000

13500

14000

14500

15000

15500

16000

1 2 3 4 5 6 7 8 9 10 11 12

Series1

Source: State statistical office in Macedonia

Chart 3

In 2008, the nominal average net wages arise from 15.555MKD to 17.363MKD, that is 11,

63% increase t in the examined period only.

Nominal avrage net wages 2004-2008

0

5000

10000

15000

20000

2004

2004-2008

Source: State statistical office in Macedonia

Chart 4

Analysis of the values of the nominal net average wage show that they move consistently

upwards during the examined sample period, in five years of examined period nominal

average net wages upraised from 11.870 to 17.363 or 46,28%.

As said previously, this research is an attempt to find out whether there exists any

relationship between the MBI10 index and the nominal net average wage in the country in

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the examined period. Thus, the dependant variable is the MBI10 index and the nominal net

average wages are explanatory variables. The list of variables and regression parameters that

shall be used in the estimation is presented in Table 1 below.

Dependent Variable: MBI_10

Method: Least SquaresSample: 1 12MBI_1001=C(1)+C(2)*NTO_PLATI01

Included observations: 12

Variable Coefficient Std. Error t-Statistic Prob.

MBI10 40754.62 4511.724 9.033048 0.0000Net wages -2.222777 0.280065 -7.936636 0.0000

R-squared 0.862995 Mean dependent var 4979.583Adjusted R-squared 0.849295 S.D. dependent vary 1724.787S.E. of regression 669.5756 Akaike info criterion 16.00218Sum squared resid 4483314. Schwarz criterion 16.08299Log likelihood -94.01306 F-statistic 62.99019

Durbin-Watson stat 1.865424 Prob(F-statistic) 0.000013Source:E-Views 3.1 (student version) Table 1

Regression formula used for this research is:

Y = B0 + B1*X

As we can see from table above this regression has negative coefficient because the short

period of time was included and other variables that vas not taken here influent on MBI10.

R-squared displays a simple linear regression analysis of independent variable against the

dependent. As we can see from table 1 86,2995% of the change in MBI10 can be explained

by the change in independent variable. R-squared results displayed here are shows that

connection is strong.

Dependent Variable: MBI10Method: Least SquaresMBI10=C(1)+C(2)* PLATISample: 2004:01 2008:12Included observations: 60


MBI10 -10638.84 2295.097 -4.635465 0.0000Net wages 1.038744 0.165161 6.289300 0.0000

R-squared 0.405465 Mean dependent var 3715.750Adjusted R-squared 0.395215 S.D. dependent var 2402.858S.E. of regression 1868.653 Akaike info criterion 17.93659Sum squared resid 2.03E+08 Schwarz criterion 18.00640Log likelihood -536.0977 F-statistic 39.55530Durbin-Watson stat 0.144239 Prob(F-statistic) 0.000000

Source:E-Views 3.1 (student version) Table 2

In table 2, above, 60 observations have been included, period from 2004 to 2008 per month,

both for MBI10 index and average net wages.

As we can see results is completely different from table 1. Number of observations changes

the look of regression. In order to get more reliable data about MBI10 index and volatility of

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Macedonias stock market in examined period in table 3 was included one more independent

variable, trading volume.

Trading volume on MSE 2004-2008

0

2000000

4000000

6000000

8000000

10000000

12000000

14000000

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58

2004-2008

Source: MSE Chart 5

From chart 5 we can see that trading volume has few high picks in 2006 and 2007, and 2007

shows constant growth of trading volume. In 2008 the worldwide economic crisis influenced

Macedonias stock exchange and trading volume fell rapidly.

Dependent Variable: MBI10Method: Least Squares

Sample: 2004:01 2008:12Included observations: 60


MBI 10 -10183.41 2178.433 -4.674650 0.0000Net wages 0.965167 0.158542 6.087762 0.0000

Trading volume 0.000329 0.000118 2.782820 0.0073

R-squared 0.476578 Mean dependent var 3715.750Adjusted R-squared 0.458212 S.D. dependent var 2402.858S.E. of regression 1768.653 Akaike info criterion 17.84253Sum squared resid 1.78E+08 Schwarz criterion 17.94725Log likelihood -532.2759 F-statistic 25.94938Durbin-Watson stat 0.391829 Prob(F-statistic) 0.000000

Source:E-Views 3.1 (student version) Table 3Multiple regression equitation shows that R square is 47, 66% and the change in MBI10 can

be explained by the change in two independent variables. The adjusted R square is adjusted

by the sample size and is useful when either increasing or decreasing the number of

independent variables in the analysis. When several redundant independent variables are

added, the standard R squared may increase marginally, if the adjusted R square reduces,

indicates the overall weaker relationship.

The Durbin-Watson statistic is employed to determine if sequential residuals are correlated.

One of the assumptions of regression analysis is that residuals are independent of each other.

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Sometimes, however, the data set may unknowingly contain an order effect, meaning that

a previous measurement could influence the outcome of the successive observations. Durbin-

Watson statistic detected positive autocorrelation at 95% of confidence.Therefore obtained

results should be considered with caution, having in mind possible consequences to the

inferential process when serial correlation in disturbances is present.

Standard error takes value 2178,433 on result of regression analysis. F statistic is 25,9494,

therefore analysis is significant.

The result of estimates of stock index volatility is then related to changes in the net wages

and trading volume.

The fact that the net real wage was not statistically significant in the short run indicates that

the MBI10 in Macedonias stock exchange in the examined period was not influenced by the

changes in the real wage levels in the short run. Maybe this is because the real wage

responds to the inflation rate more sensitively than the nominal one or maybe fear of world

economic crisis is killing investors will. Measured properly, Macedonia's inflation rate for

2008 would be at least 12%. We have often heard the excuse throughout the year that

inflation is high but it's imported. Macedonia has a fixed rate of exchange pegged to the

Euro. This effectively means we import all our goods and services at a constant Euro rate.

Thus by definition the inflationary effect from increased prices of imports cannot be higher

in Macedonia than that in the Euro zone. The 2008 Euro zone overall inflation rate is only

4%. For the first time in the last ten years, we now have negative real interest rates (interest

rates minus inflation rate) of at least 3%. The savings and wealth of Macedonia's citizens is

being eroded every day. As people realize this effect, they shift their savings to consumption

which in Macedonia's case also leads to a direct increase in the trade deficit.

It should be noted that somewhat inadequate and uncertain classifications of the MBI10

related data used in the paper might be regarded as one of the reasons for such results. In

fact, one of the recommendations for development and improvement of the financial sector

in Macedonia was improvement of the system of information trough regular surveys (several

times per annum).

To get clearer picture about Macedonian stock exchange its good to make one more

regression for the 2004-2006 period with 36 included observations where 2007 and 2008 is

excluded. MSE has many unusual movements and suspicious trading in this period. Few

broker houses were also excluded from MSE in this period for violation trading rules.

Results for 2004-2006 are presented in the table below.Dependent Variable: MBI10

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Method: Least SquaresDate: 04/29/09 Time: 11:08Sample: 2004:01 2006:12Included observations: 36


C -18003.95 1631.751 -11.034340 0.0000

NTO_PLATI01 1.580232 0.129342 12.286446 0.0000PROMET 0.000018 0.000065 -1.1141140 0.2740

R-squared 0.832545 Mean dependent var 4226.563Adjusted R-squared 0.822627 S.D. dependent var 2116.856S.E. of regression 411.5906 Akaike info criterion 17.10653Sum squared resid 5590427. Schwarz criterion 17.25472Log likelihood -386.0135 F-statistic 81.90100Durbin-Watson stat 0.971382 Prob(F-statistic) 0.000000

Source:E-Views (student version) Table 4

Source: MSE Chart 6

Again, results are completely different from previous examinations, but closer to the first

period examined in 2008.

Durbin-Watson statistic presents with 95% confidence, that positive autocorrelation is

detected.

R square presents that 0,083% of the change in MBI10 can be explained by the change in

two independent variables, average net wages and trading volume.

Standard error takes value 411,5907 on the result of regression analysis.

F statistic is 25,9494, therefore analysis is also significant.

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6. Results and Discussion

Achieved results express influence of independent variables on MBI10 index, but we can

conclude that they are not the only one that influence on MBI10 index. Nominal net average

wage constantly grows in examined period but from 2007 MBI10 index constantly falls.

World economic crisis was introduced officially in 2008, but the volatility of stock market

announced the crisis in 2007. Many foreign investment funds that were present in the

Macedonian stock exchange, freehand for their investments and stock holders withdrew their

money, making a very big gap in MSE.

Trading volume by market shares

from:01.01.2008 to:31.12.2008

Equities Max. price Min. price

Startingprice Closing price

No. oftransactions Volume Value

6.999,00 2.550,00 6.825,00 2.750,00 4.012 259.0611.291.933.603,

00

11.151,00 2.850,00 11.151,00 3.000,00 5.102 110.439 776.136.655,00

126.999,00 30.000,00 123.000,00 32.000,00 1.981 7.358 552.840.425,00

2.100,00 550 2.052,00 590 4.199 428.915 534.131.528,00

632 100 580 101 3.139 937.991 375.011.104,00 2.480,00 1.094,00 1.094,00 1.299,00 1.070 153.793 327.202.775,00

10.828,00 2.675,00 9.860,00 2.760,00 1.245 43.742 281.641.055,00

14.900,00 2.714,00 13.999,00 3.000,00 1.926 31.533 268.955.229,00

12.900,00 2.263,00 12.700,00 2.390,00 957 21.578 164.610.184,00

37.102,00 7.600,00 37.102,00 9.000,00 880 8.169 149.445.023,00

Source: MSE

Table 5

As we can see from table 4 trading volume for the ten most liquid equities on theMacedonian stock exchange market in 2008 looks very bad. The difference between the

starting and closing is almost fourfold. Only in case of construction company Mavrovo there

is a positive move, but in their case control packet of the company was overtaken by

strategic investor Ingra dd from Croatia.

There are a lot of discussions about this case. One of them is presented by Den Doncev in the

magazine Fokus 24.april 2009 in article HOW 800.000 EUROS WERE STOLEN FROM

STOCKHOLDERS IN ADG MAVROVO. He is presenting his suspicion about overtaking
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the company and insiders information that lead to big criminal activity, probably made by

the management team and some close relations.

In his article he said:

Final result of my research is this article, where I can prove that the Mavrovo case is a

classic example of insider trading. So, with information that was not publicly known, certain

group of people, which may be either from the top management in Mavrovo or Ingra, or

even from the highest positions in the state institutions, profited a staggering 800.000EURs.

The stockholders were manipulated to sell their shares for a minimal price, because no one

announced that INGRA already started the overtaking process and offered a price of

2.500MKD per share.

Mavrovo case shows how many MSE, aware or not, is corrupted or incompetent. In this case

MSE did not fulfill one of their basic tasks, protecting the integrity of stock market and

provide equal position to all participants on this market. (Den Doncev, Fokus, 2009)

Also, in this case, some of Macedonian printed or electronic media participated in creating a

public perception which was totally wrong. They aware or not participate in dark agenda of

certain structures, which intentions were to create panic among ADG Mavrovo stockholders

in order to make a profit illegally. (Den Doncev, Fokus, 2009)

Its still not very clear why MSE at first prohibit the trading with Mavrovo shares, and after

one month prohibition was thrown away, without any explanation. How this could happen

and how Macedonian stock exchange can look thru abnormally big trading with Mavrovo

shares stays unanswered.

Is there any responsibility in the Macedonian stock exchange, because they did not protect

the small stockholders from manipulations?

Who were the insiders that stole 800.000 euro?

Many questions related to this case have not been answered yet, hopefully, the state

institutions will find the insiders and will punish them accordingly.

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E. Summary and Conclusion

Understanding the stock market risk and return behavior is important for all countries but it

is of bigger importance to developing countries especially where the markets consist of risk

averse investors as there are not many opportunities to invest and diversify the investment.

The degree of volatility presence in the stock market would lead investors to demand a

higher risk premium, creating higher cost of capital, which impedes investment and slows

economic development.

This study shows the level of volatility (risk) presence in the Macedonian stock market,

which is still in the development phase. It characterizes the risk and return behavior of the

listed firms on the MSE. The robustness of this analysis is that it has allowed to test for thepresence of volatility for specific firms and if the analysis was done on aggregate data, then

it would been of less value and probably misleading. The firms, which have appeared to be

volatile, are the ones, which are sensitive to government regulations, where the liquidity has

been low over the years.

Interest rates in emerging economies have grown over the past decade (Bilson, et al.) and

this is no exception to the case of Macedonia. Over the period of the study there has been an

increase in the interest rates and this has impacted on the stock return volatility.

The extant literature suggests that a wide range of factors may be relevant in explaining the

stock return volatility. Such variables include goods prices, money supply, real activity,

exchange rates, political risks, oil prices, trade sector, and regional stock market indices.

However, in emerging markets not all factors are at play in explaining the stock return

volatility but factors like levels of political risks, goods prices, money supply and exchange

rates may be analyzed to see the empirical links with the stock returns volatility.

The findings of this research do have some implications for the investors in Macedonia as

volatility in the stock return of a firm stems from the fact that stock returns may no longer be

seen as the true intrinsic value of a firm and thus the investors might start losing confidence

in the stock market.

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7. References:

State statistical office in Macedonia

Macedonian stock exchange, annual publications

Alan O. Sykes - The Inaugural Coase Lecture, An Introduction to Regression

Analysis

International Research Journal of Finance and Economics ISSN 1450-2887 Issue 8

(2007)

Stock market liquidity and information asymmetry around Voluntary earnings

announcements: New evidence from France - Faten LAKHAL IRG ESA

Universit de Paris XII

Arestis, P., P.O. Demetriades and K.B. Luintel (2001)Financial Development and

Economic Growth: The Role of Stock Markets, Journal of Money, Credit and

Banking, 33(2):16-41.

Bilson, C.M., Brailsford, T.J. and Hooper,V.J. (1999)Selecting Macroeconomic

Variables as Explanatory Factors of Emerging Stock Market Returns. Working

Paper

Poterba, J. M (2000)Stock Market Wealth and Consumption, Journal of Economic

Perspectives, 14(2):99-118.

Den Doncev, magazine Fokus 24.april 2009, article HOW 800.000 EUROS WERE

STOLEN FROM STOCKHOLDERS IN ADG MAVROVO

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