Stock Market Bubble-Burst Cycle in Bangladesh: Policy Implications

The objective of this study is to examine the characteristics and causes of the stock market bubble burst cycle
in Bangladesh for the sample period from 2004-2014. This paper also examines whether the stock market return
has any relationship with macro and bank-specific variables in Bangladesh. Pair-wise Granger Causality tests,
Cointegration and Vector Error Correction Models (VECM) are used to examine the relationship. Empirical results
derived from Granger Causality test, Cointegration and Vector Error Correction Model (VECM) show that there is
a two-way causality from excess liquidity and private sector credit to share price index. However, there is a oneway causality from inflation to share price index. Bank deposit rate has significant negative impact on stock price
index implying that an increase in the deposit rate would decrease share price index as people shift their preference
to relatively less risky bank savings schemes.