Stock Market Crash in Bangladesh: The Moneymaking Psychology of Domestic Investors

Abstract

Abstract:After the cruel crash in 1996 Bangladesh stock market had started growing from 2006 due to listing of a few profitable government entities and Multinational Companies (MNCs). Together with individual investors nearly all commercial banks involved themselves intensely in stock market.Step by step, the bullish market transformed into a bubble and on December 05, 2010, the Dhaka Stock Exchange General Index (DGEN) reached at the record high of 8918.5, almost 5.6 times higher than December 2006. Concurrently, market capitalization and turnover increased by 11.1 times and 61.7 times respectively. However, when the bubble burst on December 19, 2010 the DGEN witnessed its biggest one day fall of 6.7 percent and since then the market has become bearish with almost no positive movement of stock prices. Against this backdrop, this study identified four moneymaking psychologies of domestic investors specifically greed, envy, speculation, and overconfidence that contributed to the formation of bubble, while four loss-minimizing and capital-protecting psychologies such as panic, frustration, lack of self-confidence, and distrust caused the bubble to burst. The bankers, brokers and manipulators were the biggest gainers, whereas the most unaware and greedy small investors encountered heavy loss. The market will be less volatile, more mature, and sustainable when most of the investors will be conscious about the potential risks and returns and the regulators will play their part sincerely and efficiently.

Do Macroeconomic Variables Affect Stock Market Performance? A Case Study of DSEX and DS30 Index of Dhaka Stock Exchange

“…At present, approximately 425 companies are listed under CSE and the market capitalization is about BDT 3,442.04 billion (https://www.cse.com.bd/market/historical_market). Since 1971, Bangladesh experienced two major stock market crashesthe first one was in 1996 and the second one was in 2011 popular as a stock market bubble (Rahman et al, 2017). Consequently, market capitalization amplified nearly 1.1 times while turnover declined about 61.7 percentthe largest fall in the history for DSE General Index (DGEN).…”

“…According to Saha (2012), the stock market started following increasing trend gradually with some institutional buyers like merchant banks, state-owned banks, and non-financial institutions bought more shares rather than selling. However, Bangladesh's stock market is characterized by ups and downs and the performance is yet far behind the expected level despite favorable policies are taken by relevant stakeholders (Rahman et al, 2017).…”

Analysing Extreme Risk in the South African Financial Index (J580) using the Generalised Extreme Value Distribution

“…According to [1], the world experienced a number of international financial crises since 1929, which include: a Recession in 1937-1938 in the United States of America (USA),the Brazilian stock market crash of 1971, the Black Monday crash of October 1987 in the USA, the Japanese asset price bubble from 1986 to 1991 and the Asian financial crisis of 1997. Studies on the Extreme Value Theory (EVT) have received much attention in finance after the manifestation of the international financial crises which also included the Global financial crisis (2007 -2008), European sovereign debt crisis (2010-2011) and the Chinese stock market crash (2015-2016).…”

Determinants of Stock Investment Decisions of Sub-urban Investors in Bangladesh

“…Many investors borrowed money for this investment from relatives, friends, family, and even from banks and credit cards for the greed of profit from this bubble and they got nothing from the stock market except huge loss. Investors' greed, speculation, envy, and overconfidence formed the bubble, and capital-protecting and loss-minimizing policies like lack of selfconfidence, frustration, panic, and distrust caused the burst out (Rahman et al, 2017). Investor decisions to invest in stock were mostly based on psychological and behavioral finance rather than financial analysis.…”