Investigating Fisher Effect in Bangladesh and Its Elements in the Dhaka Stock Exchange

Abstract

This study aims to address the existence of Fisher Effect on the Stock Exchanges. Empirically, investors in Bangladesh has faced striding up and downs on the Capital Market, much of it can be attributed to the players’ lack of competencies in technical and fundamental analysis. While various macroeconomic forces are simultaneously at work, from the major indicators, this paper selectively argues the position of the Fisher Elements in the Dhaka Stock Exchange (DSE). Results show that Real Interest Rate impacts negatively, while Inflation Rate and Nominal Interest Rate has positive effects; the latter’s impact is much more profound. In-depth analysis exhibits the absence of Fisher Effect, presence of Price Puzzle and the offsetting effects of Inflation and its role in stimulating the economy in the country using Targeting Inflation. Whereas, Real Interest Rates tend to make savings much more lucrative for the middle-class dominated population that leads to crowding out of investments in the DSE. Finally, apparent failure of the policy makers to boost the Market Index by cutting the Nominal Interest Rate has also become evident.

Keywords: Price Puzzle, Target Inflation, Fisher Effect, Dhaka Stock Exchange (DSE) General Index Point