Integration of Financial Market To develop stock market

Topics: Financial markets, Bank, Financial market Pages: 15 (5017 words) Published: August 12, 2014
Article On
Integration of Financial Market and Its Implication of Stock Market Development in Bangladesh: An Evaluation

Submitted To-

Md. Raisul Islam.
Course Instructor,
Financial Product Marketing.
Department of Marketing, 2nd batch
Jahangirnagar University

Submitted By-



Arifa Yasmin


Md. Tanjil Mahmud


Kumar Avijit Das Gupta


Md. Aman Uddin


Department Of Marketing, 2nd Batch
Jahangirnagar University.

Date of Submission- 10th August, 2014.

Integration of Financial Market and Its Implication of Stock Market Development in Bangladesh: An Evaluation

This paper attempts to test for the integration among various segments of the financial market in Bangladesh. Both casual observations and statistical analysis presented in this paper indicate that certain components of the money market such as deposit money banks, nonbank financial institutions and government treasury securities market are highly integrated. The market for the instruments of National Saving Directorate is also integrated, albeit with some sort of divergent tendency due to existence of administered interest rate. On the other hand, the interbank call money market and the stock market are not integrated with the rest of segments of the financial system due to their high volatility in the recent past. Deposit rate of the banks is found to be the “reference rate” for the Bangladesh’s financial system. Therefore, efforts must be made to make this rate as much market based as possible since most other rates tend to move in line with the movements of the reference rate. Effectiveness of monetary policy, which generally operates through the short end of the interest rate structure, would also depend on how it impacts the reference rate. Key words: Integration, financial market, stock market, reference rate.

1. Introduction
Financial market has been playing an increasingly important role in the development of Bangladesh. There are many segments of financial market including money market, stock market, bond market, insurance market, foreign exchange market and derivatives market, etc. However, money moves from one segment to another segment of the financial market due mostly to the relative rates of return in different segments. Normally, money goes to the segment in which the rate of return is higher. As long as the rate of return in a particular segment of the financial system is higher, the volume of investment in that segment will continue to grow. If the financial market is integrated, any opportunities for arbitrage will lead to an acceleration of investment in the segment with high rate of return and to a corresponding deceleration of investment in other segments of the financial market. Therefore, the integration of financial market and the consequent reduced opportunities for arbitrage are essential for stabilizing the flow of funds to different segments of the financial market promptly and efficiently. The integration of financial market is important for healthy and balanced growth of all the major components/pillars of the financial system and allows market participants to realize broadly similar rates of returns after allowing for risk and tenor in different segments of financial market.

The financial market in Bangladesh consists mainly of money market, stock market, bond market, insurance market, foreign exchange market and micro-financial market. Banks and nonbank financial institutions are primarily involved in money market. Banks play a major role in the financial market of Bangladesh. The capital market is now the second largest segment of financial system. Investment in the saving instruments issued by National Saving Directorate (NSD) is the third largest segment of the financial market of the country. In recent years, the capital market in Bangladesh has grown much faster than the other segment of the financial market. The development in capital market was...

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