Empirical Examination of Determinants of Stock Index in Nepal

This paper empirically examines the determinants of the stock index (NEPSE) in Nepal using monthly data for the period of mid-August 2000 to mid-July 2014. In order to incorporate the major changes in politics and NRB’s policy on lending against collateral of shares, two dummy variables have also been used. The correlation analysis shows the existence of the significant relationship between the NEPSE index and macro variables chosen for the study such as Consumer Price Index, Broad Money and Treasury Bill Rate. Time series properties of selected variables have been examined. Moreover, empirical results obtained from OLS estimations of behavioral equations reveal that the NEPSE index is found to respond positively to inflation and broad money growth, and negatively to treasury bills rate. This suggests that, in Nepal, share investors seem to take equities as a hedge against inflation and consider stock as an alternative financial instrument. Further, the lowering borrowing costs stimulate the investment in the Nepalese stock market. More importantly, stock market has been found to respond significantly to changes in political environment and the policy of NRB.