Behaviour of Bank Share Prices and Their Impact on National Stock Market Indices: Comparing Countries at Different Levels of Economic Development during Recessionary and Non-Recessionary Periods

Abstract

The performance of banks and their effects on the global economy has been of interest to politicians, academicians, businesses and the general public especially in connection with the 2008/09 credit crisis. In particular, the extent to which the bank stock prices affected the national stock market indices in different countries before and during the crisis is unclear. It is also not clear whether the national stock markets of countries at different levels of economic development reacted differently to the crisis. This paper contributes to filling these gaps. It uses regression and correlation analytical techniques in the analysis of the impact and behaviour respectively. The results suggest that the behaviour of most of the stock market indices was similar regardless of the level of economic development. The mean stock market indices were statistically significantly higher before than during the credit crisis. Bank share prices were generally negatively correlated comparing the period before and during the crisis. Some countries were characterised by a few powerful banks that determined the course of the respective national stock market index. This has implications on policy and reveals the intervention points in regulating the performance of stock markets and stabilizing the financial sector.

Influence of financial contagion on stock performance of firms listed in the Nairobi securities exchange

“…FTSE 100 started at around 8900 points, reduced slightly, and then increased gradually to around 10300 points while NSE 20 Share index started at around 3000 points in April 2006 , reduced slightly and rose gradually to around 4100 points in July 2007. This agrees with the observations made by Komo & Ngugi (2013) who agreed that NSE is highly interlinked with the UK stock market despite NSE being an emerging market and also geographically very far from the European Country. Fig.…”

“…The findings indicated that all indices were affected by global financial crisis. According to Komo and Ngugi (2013), these findings showed a convergence between the results and existing theories that security market indicators react negatively to news of a failing global market. In the findings, a suprise observation was that the security market indices of Kenya (NSE 20 Share Index) and UK (FTSE 100) had the second highest correlation-that is following the highest correlation coefficient which was between FTSE and NYSE.…”

“…African stock markets are illiquid and most are characterised by thin trading (Pilinkus, 2010) and this may imply that a security market indicator in Africa may not accurately portray the state of a country's economic performance. During the 2008 global financial crisis, the NSE was hardest hit by the crisis (Ahmed, 2010) yet Kenya is a developing country that is quite distanced from the epicentre of credit crisis in terms of economic growth, industrialization and economic integration (Komo & Ngugi, 2013). Shen (2011), notes that when distressed traders are subjected to regulatory or leverage constraints, they have to liquidate their positions and this may lead shareholders incurring mark-to-market losses thus being forced to liquidate as well.…”

“…A research on behaviour of bank prices and their impact on national security indices was conducted by Komo and Ngugi (2013). Their objectives were: to examine the behaviour of national security market indices across countries at different levels of economic development, to estimate the impact of share prices of leading banks on respective national securities market index, to compare the mean of national stock market idices before (2006)(2007) and during (2008)(2009)) the crisis and to compare the mean and behaviour of bank stock prices across countries at different levels of economic development before (2006)(2007) and during (2008)(2009)) the credit crisis.…”

“…The results also indicated that all countries except Brazil and India had statistically significant negative correlations. This, according to Komo and Ngugi (2013), could probably indicate that the crisis spread at different times across different countries or some countries were hard hit than others. The findings were that the correlation for indices before and after crisis was noZ statistically significant for the countries in the emerging countries.…”