Money Supply and Trading Volume Finance Essay

Stock market plays a significant role in the economic growth of a country. Stock exchange performance has an important role in global economics, because of their impact on economic activity. For example stock exchanges allow firms to acquire capital quickly, due to the effortlessness source of traded.

Stock exchange activity, therefore, plays a significant role in helping to find out the effects of macroeconomic activities. The review of literature has considerable number of studies that look at the stock prices movements. Possibly one significant subject that has inward increasing interest from economists, financial investors and policy makers is on active effects of macroeconomic pointers on stock prices. Macroeconomic forces have regular influences on stock prices by way of their influences on expected future cash flows. Stock exchange prices are extremely sensitive to essential macroeconomic pointers.

The effect of different policies on the growth of an economy can be calculated by the increase in stock exchange prices (Abdullah, 1997). TheKarachi Stock Exchangeis astock exchangesituated inKarachi,Pakistan, established on 18 September, 1947 it started with 5 companies with a capital of Rs. 37 million. It is Pakistan’s biggest and oldest stock exchange, with a lot of Pakistani as well as overseas listings. Its present premises are placed on Stock Exchange Road, in the heart of Karachi’s Business District. KSE starts with a 50 shares index. As the market developed a representative index was needed. In poor political condition, social issues, financial and other problems, KSE played a vital role in the economy of Pakistan. KSE 100-index showed a return of 40.19% and became the sixth best markets in the year 2007. It gets a biggest milestone by touching of KSE-100 Index level of 15,000 for the first time in the history of Karachi stock exchange on 20 April, 2008. On the other hand, the raise of 7.4 percent in 2008 build-up the best performer in all the emerging market. As at June 1, 2009 there were 651 companies listed at KSE with market capitalization of US $ 26.48 billion having listed capital of US $ 9.65 billion.

The KSE 100TM Index closed at 9645 points on 19 June, 2010. Although by 30th July total market capitalisation of the KSE reached Rs2.95 trillion, approximately around 35 billion dollars (Safi Ullah Khan and Faisal Rizwan, 2008). Karachi Stock Exchange 100 Index(KSE-100 Index) is astock indexacting as a standard to compare prices on theKarachi Stock Exchange(KSE) over a period of time. In formative representative companies to calculate the index on, companies with the maximummarket capitalizationare selected. On the other hand, to ensure maximum market representation, the company with the maximum market capitalization from each sector is also incorporated. Karachi Stock Exchange is the largest and most liquid exchange in Pakistan. Money balances are merely one of a number of highly liquid assets which the individual may consider as part of his liquidity portfolio evaluated by the sum of financial and real assets. A steady rate of growth in the money stock matched with real growth in economic yield should generate no serious longer-run liquidity. One would expect the demand for liquidity balances to rise as real output and, in return, incomes rises. Under this situation, one may think as to the forces generating general asset price modification.

Possibly such alterations would be associated to the economic viewpoint, emotional pressures, and altering inclination amongst investors for financial assets. In addition, these forces would be unlinked to money stock. When the economy’s money supply rises, investors come across that the money portion of their assets is too huge and effort to regain the wanted portfolio mix by purchasing other assets such as stocks, compelling their prices to increase. The understanding of the stock market has long attracted mutually the academician and the stock trader. Consequently, this area has produced a number of descriptive stock market models ranging from those based upon exact analytic frame works to doubtful intuitive reasoning .Money flow-whether money is flowing into or out of a meticulous security-is supposedly an indication of present excess supply or demand. That is, if uptick trades are supposed to be the buyer initiate and downtick trades are supposed to be seller initiate, a positive disparity between uptick dollar volume and downtick dollar volume match up to “excess demand.” Furthermore, proponents of by means of money flow state that existing excess demand (supply) predicts future excess demand (supply) and, as a result, positive (negative) money flow forecasts stock-price raising in a falling trend (Gllent, Rossi, and Tauchen, 1992). A several factors are attributed to the optimistic sentiment in Pakistan’s stock market throughout the last seven years (2000-07). These factors include: fast privatization practices of government owned enterprises, attract foreign investors in important organizations, like Pakistan Telecommunication Company Limited, Electricity Supply and National Refinery and so on, allowing foreign investors to send their funds without any constraint; decrease in the interest rates by the banks; continuous development in economic essentials and higher industrial growth. These aspects are attached with different rules and laws, were introduced mostly for the security of the small investors, and to get efficiency in trade by computerization and restriction insider trading.

These methods were taken besides reinforcement the structure of the Security Exchange Commission of Pakistan (SECP). These significant developments and measures have put in to the extraordinary growth in Pakistan’s equity market throughout the last several years (Safi Ullah Khan and Faisal Rizwan, 2008). The type of the link between money supply and common stock prices can be most defined as if a share of common stock is observed as an asset that produce its profits to the investor over time. When stock returns are linked to these better anticipations of money growth rates prior money terminologies drop practically all importance while present and particularly the next two months’ money terms persists to show a obvious link to current stock returns. This is a proof that stock returns predicts future monetary disorders by utilizing of information as well as information of current and past growth rates of the money supply (Barro, 1977). This study explored the relationship of Money Supply (M2) and tradingvolume of KSE – 100 Index that whether they have the positive or negative relationship among them. Hence following hypothesis is constructed in order to get the desired result.

The data used in this research has taken on the monthly basis. Moreover Monthly Money Supply is taken as independent variable and Monthly Trading Volume of KSE – 100 Index as a dependent variable.

Hypothesis:

Money supply (M2) has a significant relationship with trading volume of KSE – 100 Index” CHAPTER 2:

LITERATURE REVIEW

Money Flow is assured as the disparity among upward and downward trading degree, has been used as an expertise pointer since the beginning of 1970s. Newly, however, the recognition of the rate has amplified radically. For instance, since October 1998, the Wall Street Journal is covering money flow for 4 main indexes and the 30 companies with the maximum and minimum flows on daily basis (Fama and K. French, 1997) Moreover much cyber investment investigating sites supply money flow statistics. Whether money is curving in or out of a specific security is supposedly a clue of present surplus supply or demand.

That is, if upward trades are supposed to be consumer started and downward trades are supposed to be supplier started, an upbeat distinction among upward dollar volume and downward dollar volume relate to “excess demand.” Likewise, proponents of utilizing money flow state that present excess demand (supply) forecast upcoming excess demand (supply), thus, positive (negative) money flow predicts stock-price raise (decline) (Brown and Brooke, 1993). Trades that took place at a top (low) price than the prior trade were categorized as rising (declining) trades. Trades that happened at the same price as the prior trade do not put in to money flow and were deleted. The money flow linked with each lasting trade in the research is the dollar volume of the trade, declared positive if the trade took place on an upward and negative if the trade took place on a downward. These both money flows were aggregated to calculate the day to day money flow for each company. However money flow is also expected to have link to consequent money flow and return.

Many reasonable settings are expected to upshot in such money flow determination (Barclay, 1993). Most economists are in agreement today that monetary policy has selected significance in scheming the economy, there is petite agreement as to how vital it is, or which monetary variable is the main variable. Pre-Keynesian economists articulated that there was a conventional connection among the money supply and GNP. If the volume of money is doubled, for instance, for any basis, the interest rate would drop primarily.

The abridged interest rate would rouse borrowing, investment and consumption while the reason to keep would be compacted. Total demand for goods and services would thus be raised and with a stable dynamic ability, prices would have to go up. Thus, once prices start to go up, the interest rate would go up again in answer to the equivalent drop in the “real” money supply. Prices would go up until they were doubled their initial level, thus tumbling purchasing power of the money supply to its earliest value and stability would be reinstated. The interest rate would also go back to its initial level, where saving and investment are alike.

Economists first became cynical with this typical monetary theory during the depression for many good causes. For one thing, while the money supply about twice over between 1933 and 1940, prices risen up only a little and economic doings stayed in the depressions until the huge increase in government war costs lastly drawn the country out of the doldrums (Bollerslev, 1992). In the quarter century since World War II, the reverse happening took place-the economy arouse at more than twice the rate of money supply growth. Most economists finally decided that, opposing earlier views, the link between the money supply and GNP was very floppy. In late 1940’s, Keynesians measured money supply to be only one of the many factors which control the economy (Hossain, 1990). Fiscal policy is deemed to be of little significance in scheming the economy, principally in contrast to money supply. In contemporary years, the Economics Department of the University of Chicago has become the core of a new quantity theory, alike the old one, but that the Chicago School analyze that money supply straightly influence spending, apart from the trend in interest rates. Both sides see eye to eye that a more quick monetary growth, with any given fiscal policy will arouse the economy. The variation is that Keynesians see the money supply as being a more inactive factor in the inflationary illustration.

Both schools of thought have a same mind that at least in the short process, a rise in bank reserves will be liable to lower interest rates since the supply of loan able funds is risen up. The new monetary theorists analyze that the increase in the money supply is so accelerated to the economy and the demand for loan able funds that in the long process interest rates certainly go up to higher levels. The “cost of capital” relies upon stock revenue, interest rates and certain tax changes such as the 7% investment tax credit. The main source of short-term fluctuations in personal wealth, that is “wealth effect”, is the oscillations in the stock market. They found “credit rationing” to be significant mainly for housing expenditures.

When stock prices drop sharply, consumers reduce their spending because of the cut back in their personal wealth (Chan and Lakonishok, 1995). The negative returns over weekends to transfer in the broker’s shareholder balance in decision to buy & sell. During the week, investors, too busy to do their personal research, tend to follow the advice of their brokers, advice that are skewed to the buy side. On the other hand, on weekend’s investors, free from their personal work as well as from brokers, do their personal research and tend to reach decisions to sell. The outcome is an internet excess supply at Monday’s opening. It is supported by proof showing that brokers do tend to make buy recommendation, by proof that odd-lot dealings tend to be net sales, and by data showing that odd-lot volume is mainly high and institutional volume is mainly low on Mondays. Thus, individual investors tend to sell on Mondays when the shortage of institutional trading decrease liquidity. An additional explanation for the negative weekend effect is that share prices close “too high” on Fridays or “too low” on Mondays. One alternative attributes uncommonly high Friday closing prices to settlement delay.

The delay among the trade date and the settlement date charge an interest-free loan until settlement. Friday buyers get two additional days of free credit, creating an encouragement to buy on Fridays and pushing Friday prices up. The decline over the weekend reflects the removal of this incentive.

Friday is the day with the best volume and with the mainly positive stock returns. KSE is termed as high-risk high return market where investors seek high-risk premium. During early nineties the non-informational factors apply greater pressure on stock market activity in Pakistan (Hossain, 1990). The primary cause for stock market declining with tight money and high interest rates, apart from the final effect on corporate earnings, is the fact that all financial assets are substitutes, at least to some extent. All the other things being alike, Increase in interest rates will give some investors opportunity to sell stocks and buy fixed income securities. The function of the stock market, in put out modifications in monetary policy to the “real” variables in the economy, is becoming broadly acknowledged among economists of both schools of thought. It is a concept worth deliberating in shaping investment timing strategy (Barclay and Warner, 1993). The variations in the rates of expansion of the private sector’s stock of money may affect that sector’s want to exchange money balances for other financial assets.

This exchange, in return, may cause pressures heading to variations in the prices of these financial assets. Given these links, two common situations can be found: (1) Raise in the rate of expansion of the money stock may cause liquidity surplus. This imbalance may stimulate the private sector to exchange excess money balances for small liquid financial assets such as corporate stocks. This exchange may head to increase buying pressures on these small liquid financial assets. Strengthened buying pressures, in return, may provoke price level rising up with respect to these specific assets. (2) A drop in the rate of growth of the money stock may cause a shortfall liquidity situation.

This imbalance may cause a transmission from less liquid financial assets into money. The conclusion of the private sector’s effort to acquire liquidity balance may cause selling pressures on these less liquid financial assets which may generate general price dropdown (Granger, 1996). Conversion of money into near money holdings will not alter the private sector’s money stock. Movements of funds into such nonbank financial intermediaries as Savings and Loan Associations just transfer the holdings of money balances i.e., from individuals to nonbank institutions-but do not modify the dollar amount exceptions. It should be observed, however, that currency with-drawls (transfer from demand deposits into currency) by individuals will trim the reserve base of commercial banks and thus restricting their offering capacity. If no counter policy is commenced by the Federal Reserve System, the capacity of commercial banks to make loans and, in return, increase the nation’s money supply, will be diminished (Chan and Lakonishok, 1995). Money balances are merely one of a number of highly liquid assets which the individual may consider as part of his liquidity portfolio evaluated by the sum of financial and real assets. A steady rate of growth in the money stock matched with real growth in economic yield should generate no serious longer-run liquidity. One would expect the demand for liquidity balances to rise as real output and, in return, incomes rises.

Under this situation, one may think as to the forces generating general asset price modification. Possibly such alterations would be associated to the economic viewpoint, emotional pressures, and altering inclination amongst investors for financial assets. In addition, these forces would be unlinked to money stock (and liquidity) changes (Berkman, 1978). Some proposals about the stock market are broadly accepted, most of members of the financial community possibly agree that alterations in Federal Reserve Board monetary policy tightly affect changes in stock prices. Since past 10 years, the significance of the rate of money supply expansion to the economy and to the stock market has been increasingly acknowledged. For many stock market analysts, money supply movements are now handed as advanced indicators of trends in central bank monetary policy and are regularly deduce as proposing updates about future stock price movements. Margin requirements, the discount rate, federal funds rates, reserve requirements and statements by Fed officials are broadly conveyed in the financial press and are recognized indicators of whether monetary policy is “tapering” or “slackening,” with the anticipation that a tighter monetary policy will be linked with falling stock prices and a simpler monetary policy with increasing stock prices.

Business cycle turning points are linked with previous alterations in the rate of growth of the money stock (Rosa, 1999). Predictive form of the monetary portfolio model describes how modifications in growth rates of monetary accumulates heading changes in the prices of stocks (and financial assets) and lead amendments in prices of consumer goods and services. The monetary portfolio model sees investors as holding portfolios of such assets as stocks, bonds, durable goods and money.

Investors decide the fraction of wealth they desire to hold in the form of money. When the economy’s money supply rises, investors come across that the money portion of their assets is too huge and effort to regain the wanted portfolio mix by purchasing other assets such as stocks, compelling their prices to increase (Karpoff, 1987). Sprinkle outlooks this chain as consuming enough time that one can foretell stock price alterations given information of precedent money supply movements. His main propositions are that as an indicator, the money supply sequence heads stock prices and that the sharp investor can avail this leading indicator to gain above-average profits in stock market investment. These statements have gone greatly unbeaten.

Certainly, though that monetary change leads to stock price change using money data which they state is more returnable than a corresponding-risk, naive policy of buying-and-holding stocks. Thus there is a upright body of view that consider the money supply as an indicator by which movements in stock prices can be predicted (Michael, 1974). The capable market model also offer a clarification for the markdown of future proceedings by the stock market. If information goes up in current that has implications for future stock prices, investor activity will change the current price level so that the predicted proceeding is marked down in today’s price. Since discounting can happen with respect to uncirculated as well as circulated information, the stock market can be competent with respect to uncirculated information; that is, prices may wholly show uncirculated as well as circulated information. In the occurrence of money supply movements, a situation can simply be pictured in which knowledge (published and unpublished) becomes accessible which permits investors to predict (correctly) preceding money growth rates. Thus, in a competent market, it would not be at all shocking to uncover that stock prices alteration in prediction of money supply changes if investors bring into play the substitute sources of information to estimate the heading course of the money supply. Also, market onlookers may extract implications about future money supply growth by viewing money market rates and present and predicted Treasury financings (Bollerslev, 1996). If investors deem money supply data to be positive for stock prices and if the stock market is competent, then struggle by investors aiming to use stated information about alterations in the money supply will upshot in a level of stock prices. A statistical technique that beats these problems and offers a potent test of the power of money supply modifications on stock prices is linear regression.

This scheme gives a clear measure of the fraction of the change in stock prices linked with prior changes in money growth rates. Moreover, with this statistical technique, a testimony can be made of the probably that any pattern shown in the data could have happened by chance (Brown and B. Brooke, 1993), The short of a association among stock returns and prior money data is at first glimpse an upsetting outcome for monetarists (those economists who have emphasis the main role that the money supply plays in changing the price level). Though, the similar linear regression method that shows the trivia of prior changes in the money supply to stock prices demonstrate that the current or consecutive money supply change is fairly important. The monthly money data in the phase since World War II, for example, can reveal about 4 to 10 per cent of the change in stock returns once the current money data is considered. Variations in monetary growth rates are solidly linked to the stock market once the current changes are taken account for, a outcome that pact with the monetarist view of Sprinkle and that monetary policy have impact on markets. But there is no proof of long delays in stock market response, therefore, of any possibility of returnable expecting stock prices, using variations in monetary policy; prior data has been wholly showed in stock prices of past periods, So cannot help to guess future movements. In addition, a non-expected form of the monetary portfolio models appears to turn the facts while a predictive form does not. That information may be accessible to the stock market that allows an precise review of upcoming money supply growth and that current stock prices reveals this information. At a minimum, if past money supply growth offers a sign of future money growth, the inference of past money growth for upcoming money growth would be marked down in a capable market (Wang, 1990) Further than, present data on the monetary base, money market situations, etc., may offer a foundation for consistent foretells of future money growth. If the stock market unfailingly and precisely predicts upcoming monetary growth, it is anticipated to one look a link among current price changes and future recognized money supply variations. To examine for this link, we summed up upcoming variations in money growth rates to the present and prior terms by now present in the linear regression explaining present stock returns. On a monthly footing, in all periods and sub periods and with numerous meanings of money, the outcome is a remarkable and progress in the relationship between stock returns and variations in money supply growth. In the era of 1960’s, for example, the influence of the money terminologies to describe stock returns leaped from about two to 16 per cent once we add up upcoming money changes.

This numerically important link reveals that a significant fraction of the changes viewed in present stock prices can be associated to following variations in monetary growth rates. The link is also a positive one; more than usual stock price rises are linked with subsequent more than usual money growth rates (Karpoff, 1987). The conduct of stock price varies over changes in money growth rates is 1 to 2 months. The escort of stock returns over future monetary growth continues under some different money supply meanings and utilizing some forms of data weekly, monthly or quarterly. It can be revealed to continue under a more precise test. If a test is held for the accessible sequence of comments of money growth rates, it can be viewed (using regression methods) that when money growth is bothered from its normal track, the disturbance continues for additional months (Gllent, Rossi, and Tauchen, 1992). Therefore a higher (lower) growth rate of the money supply noted today foreshadows a higher (lower) growth rate for the upcoming months. This propensity for monetary disturbances to continue defines that information of prior money supply growth assists to anticipate future money supply growth. Probably stock returns seem to predict future money growth rates as stock prices bend to the current growth rate and the disorder in the current growth rate is predicted to continue to test this speculation constructed new methods of future unpredicted growth rates that considered the inclinations for monetary disorders to continue (Chan and Lakonishok, 1995). When stock returns are linked to these better anticipations of money growth rates prior money terminologies drop practically all importance while present and particularly the next two months’ money terms persists to show a obvious link to current stock returns.

This is a proof that stock returns predicts future monetary disorders by utilizing of information as well as information of current and past growth rates of the money supply. Not only is the money supply a bad indicator of upcoming variation in security prices, the current movement of stock prices offers information on upcoming money supply movements (Fama and K French, 1997). This link of money and stock prices, which is the overturn of what money supply observers have been led to anticipate, under-scores the uselessness of making effort to expect stock price movements with money supply info. It provides more evidence of a proficient stock market for which money seems to matter, though the link process in an unanticipated way.

The movement of stock prices prior to money supply varies may be considered as proof that the monetary concerns are responding to prior stock price movements. This analysis is accurate with the viewed association but does increase the hard question why the Fed would drop monetary growth after viewing draping stock returns and vice versa-a policy which, in the usual view, would entail still lower stock prices. A second probable understanding is that stock prices and Federal Reserve concerns responds to the similar information but with stock prices responding more rapidly than the Fed. Growing interest rates, for example, are escorted by dropping stock prices, other things similar. Increasing interest rates are also on average followed by lower monetary growth rates though the link is a poor one. Joint associations with variables such as interest rates may define why stock prices of prior periods, hence cannot assist to anticipate future movements. In addition, a non-predictive form of the monetary portfolio model seems to suit the facts while a predictive form does not (Rosa, 1999). Though economic methods have been practiced with a level of success in studies of controllers of individual common stock prices, fairly little attentions has been given to the use of these methods in foretelling shorts run movements in collective indices of common stock prices.

This deficiency of attentions is not shocking since precise forecasts of the average degree stock prices are of clear and practical importance for knowing the timing of stock markts investment ideas. In aaddition, econometric forecasting methods have the significant advantage that they produce upshots that are objective and quantitative and be constantly imitated (Berkman, 1978). It remain authentic, that the practise of economic methods to stock market foretelling is hard. The main difficulty is that any supposed link between stock prices and economic variables must rely strictly on predicted factors. Hence, given the restricted success econometicians have had in clarifying the establishment of predictions, it is obvious that a whole structural requirement of the determinants of stock prices is not promising at this time. On the other hand, this dilemma need not introduce the cradle of partial links between economice variables and a stock index. As a result, it seems valuableat this time to assume at least an research study of the significance of economic methods foretelling the average degree of stock prices (Richard, 1974). The type of the link between money supply and common stock prices can be most defined as if a share of common stock is observed as an asset that produce its profits to the investor over time. When stock returns are linked to these better anticipations of money growth rates prior money terminologies drop practically all importance while present and particularly the next two months’ money terms persists to show a obvious link to current stock returns. This is a proof that stock returns predicts future monetary disorders by utilizing of information as well as information of current and past growth rates of the money supply (Barro, 1977). The main reason for the affect of money supply on dividends functions through the firm’s present and predicted earnings.

Provided the demand for money, a drop in the supply of money will increase interest rates and decrease interest precise expenditures like capital investment. The drop down in expenditures, together with the recognized multiplier, will then set off a decrease in firm’s sales and thus reduce in its earning. The period of the effect of the reduced earnings on dividends may rely on the firm’s cash flow and liquidity position, but eventually the whole effect must be a reduce in dividends. Though the current price of the common stock share will drop if current dividends are dropped, the important point of leverage for result of the money supply is on the predicted growth rate of dividends .For this reason, the predicted results of the money supply on dividends are as significant as any other actual short run results in knowing the reactions of the share price (Michael, 1974). The affect of the money supply on thesafe interest rate elements of the investor’s cut down rate is a direct function of the effect of the money supply on market interest rates.

The open increase in market interest rates due to risen monetary tightness may, in addition, be praticed by credit rationing in the loan market. The deteriorating situation of law and order and making up political uncertainity dangerously influenced the stock prices. A vast part of capital inflow in stock market was because of portfolio investment. the inflow and out flow of capital relies on the political and economic situation of the country. It is also created excessive fluctuation in stock market. In this situation, monetary tightness will increase the discount rate by an amount larger than would or may b indicated by the degree of market interest rates alone.as the effect of dividends on money supply, it should be emphasized that the main impact of the money supply on the safe interest rate is in terms of the variations in the predicted readings for upcoming levels of this rate relatively than in the original variation in the current value (Diamond, 1981). Though the main channels for the impact of the money supply on the price of common stock shares can be differetiated in the heading way, a plain form for the links must be mentioned if the link is to be assumed and utilized for forecasting. By having thses turning points in a stock prices index compared with the turning points in the groth of money, sprinkle framed an investment rule that,”a bear market in stock prices was predicted 15 months after each peak in monetary growth, and that a bul market was predicted two moths after eac monetary growth trough was reached (Granger, 1996). The link between the money supply and thestock market is created using the methods of regression analysis. Comparitively the regression analysis has more advantages. It allows for more elasticity in makin particular lagged associations. In specific, particular peaks in the money stock and monetary growth sequence do not have to be simply recognised. The forecasts caused by a regression equation are quantitative and the recognised mistake attritbute that the unsurity linked with the forecast can be considered when planning an investment strategy (Chan and Lakonishok, 1995). Announcements about economic variables may also have impact on trading volume if the market member resetting their portfolios based on some new knowledge. If market member disapprove the impacts of surprises in announcements, there should be risen up trading actions in the market quickly after the announcements. In difference, if they are in agreement about the impact of new information, trading actions may not be unusual even when prices vary. Thus, testing the trading activity offers useful info about the activities taken by the market members based on macroeconomic news that stock returns alone cannot do (Bollerslev, 1996). Financial market members are cautious viewers of the weekly money supply declaration, and usually agree that the announcement often heads to variations in interest rates.

This happens because the announcement leads market members to rethink their anticipations both of future federal reserve policy activities and of upcoming economic situations (Granger, 1996). Real growth of the money supply heads to less interest rates through a liquidity impact. Though, quick monetary growth which is not expected channels market members to predict the federal reserve to reducet such growth in the future. As a result, there may be a policy expectation impact which is responsible for higher interest rates in prediction of future tightening. in addition, prolonged quick monetary growth also causes inflation and inflationary anticipations which creates higher interest rates. therefore, there may be a third impact, the inflationary anticipations effect which also creates higher interest rates (Karpoff, 1987). The policy expectation effect is best defined by example.

Assume that the declared variation in the money supply ismore than that expected by market members on the cause of priorexperience and policy announcements. assume more that monetary growth is the federal reserve’s policy concern. it would, thus, be right to anticipate that the federal reserve will make effort to decrease the growth of the money supply. Policy activities to do so would rise the federal funds rate and in result other market interest rates would also increase in expectations. That’s why, the policy anticipation effect of an unanticipated increase in the money supply is rising in market production. a liquidity impact which goes down produces when the money supply go up is not a same reaction to the money supply announcement because the liquidity effect happens when open market actions are organized (Chaudhary and Parai, 1991). The announcement made at the end of the week offers data for the money supply on wednesday of the prior week. Furthermore, the money supply is influenced by the open market actions which happened some time earlier.

Though growth in money supply can lead market members to rethink upward their anticipations of inflation and certainly of real growth, such reactions are both constant and delayed. Hence, the rapid impact result of the anticipation of a reaction by the federal reserve. a variation in federal reserve policy can happen on the day after the announcement when open market actions are held during early 90’s the non-informational influences hugely affect on stock market operations in pakistan. these causes include structured variations in stock market, planning and making the stock price index, founded on market capitalization. These were the cosequences of financial liberalisation and deregulation policy. This has significant influence in the form of undefined and risk aversion. Because of uncertain regulatory and poor enforcement of policies,its increasing the problem like insider trading and unchecked margin requirement trading. as a consequence these caused the leverage which can simply forced investors in bankruptcy problem if the investors anticipation about future prices are not acknowledged.

Numerous huge project in private sectors like ptcl, hubco and others which drwan the investors mainly the foreign investors took away all excess liquidity, which in result sparked off the stock selling for desire of liquidity and this caused price fluctuations. preferential treatment for broker as jobber and involvement in speculative trade were also the cause of uncertain fluctuation in prices (Siddiqui, 1990). The deteriorating situation of law and order and making up political uncertainity dangerously influenced the stock prices. A vast part of capital inflow in stock market was because of portfolio investment. the inflow and out flow of capital relies on the political and economic situation of the country. It is also created excessive fluctuation in stock market. The link between stock prices and trading volume in context of karachi stock market’s daily data for very small time period i.e. nine months data. he discovered that importance of non-informational trade in defining the fluctuations in stock prices. the role of non-informational trade on stock prices is defined by introducing the variations in volume as non-information factor.the trading volume is multiplied with returns. trading volume gives the weightage to returns on those days when trading volume is higher than the returns on the days when it is normal. By this the impact of returns on the days of higher trade on the next day returns can be determined (Hossain, 1990).

CHAPTER 3:

RESEARCH METHODS

3.1 Sample size and sampling technique:

The Sample size chosen for the analysis is 58, the data of 58 consecutive months have been taken for analysis.

3.2 Data used:

Secondary data is used in this research to analysis this data.

3.3 Method of Data collection:

Data of two variable i-e Money Supple (M2) and Trading volume of KSE 100 index was collected from State bank of Pakistan and Karachi Stock Exchange respectively.

CHAPTER 4:

Hence in this research, secondary data is used and the internal consistency of the data extracted from the sources needs to be determind so for this reason Reliability analysis has been analysed and research has found that data is reliable and consistent. Reliability analysis allows studying the properties of scales of measurement and the things that build them up. The Reliability Analysis procedure calculates a number of frequently used procedures of level reliability and also gives information about the associations between individual items mentioned in the scale. Table 4.1: Reliability test Cronbach’s Alpha is the internal consistency model which is based on the average correlation. Here the value of Cronbach’s Alpha is 0.848 which indicates that the data is consistent.

4.2 Hypothesis testing:

In this research, Hypothesis constructed was as followed and for testing this hypothesis regression analysis has been used to analysis and interpretation of the data: Hypothesis: Money supply (M2) has a significant relationship with trading volume of KSE – 100 Index The above table shows the three variables that are used in performing the analysis these are Volume of Shares, Money Supply and Lag on first Level. Sample size chosen for the analysis is 58. Table 4.3: Correlation The above table shows the correlation among the variables, as we can observe that significant value of correlation test is less than 0.05 it means that there is correlation exist among the variable. The Relationship between Money Supply and Volume is negative or inversely proportional; correlation values for Volume and Money Supply is -.625. Table 4.4: Durbin Watson Initially when research applied the Simple Linear regression it has been identified a problem that there was a strong presence of Positive autocorrelation in the data set as the value of Durbin Watson was 0.959. In order to resolve the issue lags was generated up to the 2 levels out of which lag 1 becomes significant for the model. Table 4.5: Model Summary As it can be observed that the Adjusted R Square for the above model is 0.536 that is 53.6%, it means that our independent variable sets are explaining 53.6% of the variation in dependent variable.

For e.g. if 1 unit change occurs in the independent variable set the change in the dependent variable is 0.536. From the above table we can observe that the Durbin Watson Value is 1.817 that is near to the value of 2 it means that we have solve the problem of Auto correlation in the data set. Table 4.6: ANOVA The regression value is less than 0.05 in the ANOVAs table it means that regression model is suitable to apply on the data set. The constant value for the above model is 6060 it means that if the money supply is equal to zero the volume of shares is equal to 6060.651. The beta value for the lag 1 is 0.512, lag 1 means that the volume of shares on any day is dependent on the last day volume. For e.g. if 1 unit change occur in the last day volume the change it will bring in today volume is 0.512 of the last day. The Beta value of money supply is equal to -0.001 it means that there is negative relation exist among the money supply and volume of shares for e.g. if 1 unit increase take place in the money supply the volume of shares will decrease by 0.001. Variance Inflation Factors values are equal to 1.540 less than two, it means there is no existence of multi-co linearity in the data set. It has been proved from the above analysis that there is a significant relationship exist between money supply and Volume of KSE 100 Index, our Null Hypothesis is rejected. From the above diagram we can clearly understand the trend of volume over the passing years, in 2004 the volumes range were between 6000 to 7000 but in 2005 there was a huge jump observed in the volumes. We can observe the variation in the volume by the size of the Box Plot. After 2006 as we can see volumes are showing declining trend and in 2009 (economic recession period) the volumes are on very low side as compare to last six years. Graph 4.9: Money supply per year We can clearly observe from the above table that money supply has been increased in the last six years and in 2009 the money supply was enormous as compare to last five years. Stock markets are the true representative of the economy, if there will be a presence of high inflation in the country the investors shrink their business activities due to the chances of currency devaluation.

The business activities shrink out and people are not willing to invest in the stocks. Government will inject more money in the market in order to increase the money supply as more money is required to buy the same commodities.

Whenever economic recession occurs the activities in the stock markets shrinks, people are getting their money out from the market and doesn’t willing to invest again until and unless they foresee the improvements in the economic conditions of a country.

CHAPTER 5:

CONCLUSION

Stock market plays an important role in the economic development of a country. Stock exchange performance has attained significant role in global economics and financial markets, due to their impact on corporate finance and economic activity. For instance stock exchanges enable firms to acquire capital quickly, due to the ease with which securities are traded.

Stock exchange activity, thus, plays an important role in helping to determine the effects of macroeconomic activities. The Karachi stock exchange has played a very significant role in the economy of Pakistan. Karachi Stock Exchange 100 Index(KSE-100 Index) is astock indexacting as a benchmark to compare prices on theKarachi Stock Exchange(KSE) over a period of time. In determining representative companies to compute the index on, companies with the highestmarket capitalizationare selected. However, to ensure full market representation, the company with the highest market capitalization from each sector is also included. Karachi Stock Exchange is the biggest and most liquid exchange in Pakistan.

The money flow linked with each lasting trade in the research is the dollar volume of the trade, declared positive if the trade took place on an upward and negative if the trade took place on a downward. These both money flows were aggregated to calculate the day to day money flow for each company.

However money flow have link to consequent money flow and return. This research was mainly focusing on the relation between the money supply and trading volume of Karachi stock exchange. The findings showed that there is a correlation among the money supply and the trading volume has exist due to its significant value of correlation. The Relationship between Money Supply and Volume is negative or inversely proportional. Hence, finding by using the regression model, the money supply is equal to zero the volume of shares indicating that the volume of shares on any day is dependent on the last day volume and there is negative relation exist among the money supply and volume of shares as there is no existence of multi-co linearity in the data set. It has been proved that there is a significant relationship exist between money supply and Volume of KSE 100 Index, Null Hypothesis is not rejected. It has concluded from the research finding and results that the money supply has been increased in the last six years and in 2009 the money supply was enormous as compare to last five years. Stock markets are the true representative of the economy, if there will be a presence of high inflation in the country the investors shrink their business activities due to the chances of currency devaluation.

The business activities shrink out and people are not willing to invest in the stocks. Government will inject more money in the market in order to increase the money supply as more money is required to buy the same commodities. Whenever economic recession occurs the activities in the stock markets shrinks, people are getting their money out from the market and doesn’t willing to invest again until and unless they foresee the improvements in the economic conditions of a country.

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