NEPAL’S stock market behaves like a toddler let loose after too much sugar. One moment it collapses in a heap; the next it sprints off with wild, breathless joy—often with no real news to justify either move. Take December 8th 2023. A surprise interest-rate cut by the central bank sent the NEPSE index shooting up by almost 15% in a matter of weeks, neatly reversing the damage from a sharp fall just before. Lurches, reversals and mood swings like these are no longer aberrations. They are the market’s defining feature. Which raises an obvious question: why is it so jumpy?
The answer is disarmingly simple—and faintly worrying. Dinesh Gajurel of the University of New Brunswick has put numbers to the madness in a paper that dissects the NEPSE’s nervous temperament. His findings back up what anyone who trades in Kathmandu already senses in their bones: Nepal’s stock market is not merely volatile. By global standards, it is extreme.
What drives this? Above all, the market is dominated by uninformed traders. And that shows up in curious ways. Returns are right-skewed: big gains show up more often than big losses. That flips a long-standing empirical rule on its head. In most markets, bad news hits harder than good, producing left-skewed returns. Not here. Nepali investors greet good news with unbridled enthusiasm, pushing prices up with gusto, while bad news tends to be shrugged off—or at least underplayed.
That imbalance makes far more sense through the lens of behavioural finance than through tidy textbook theories. Classic explanations—the leverage effect, or the idea that losses mechanically breed more volatility than gains—do little work in Nepal. What matters instead is sentiment. And fear of missing out. It is a familiar brew to anyone who has watched lightly regulated markets whip themselves into a frenzy.
Mr Gajurel also finds that NEPSE returns have memory. Gains tend to follow gains; losses arrive in clusters of their own. This predictability is a red flag. In a properly efficient market, prices should wander like a drunkard—unpredictable, uncorrelated, forgetful of the past. Nepal’s market remembers. Worse, its investors often reinforce trends rather than lean against them, magnifying mispricing instead of correcting it.
Geography might suggest some external anchor. Nepal trades heavily with India; its investors watch Mumbai closely. One might expect the NEPSE to move in step with regional or global markets. It does not. There is no meaningful link with American indices, and India’s market seems to exert a perversely negative influence. The likely culprit is institutional weakness: thin regulation and fragile investor protection leave room for manipulation—pump-and-dump schemes chief among them—snapping the usual connections that tie markets together.
None of this is harmless. Volatility of this sort loads risk onto retail investors, scares off long-term capital and hollows out the stock market’s role as a signal of economic health. Small wonder the NEPSE barely registers globally, or that many participants treat it less as a place to invest than a place to gamble.
Regulators face an uphill slog. Mr Gajurel calls for tougher scrutiny of manipulation and a serious push on financial literacy. Both are sensible. Both run into hard constraints: a shallow market, scant corporate disclosure and an investor base still driven more by speculation than analysis.
For the NEPSE to grow up—to become something other than a carnival ride of euphoria and panic—it needs prices to respond to information, not impulse. Until then, investors would be wise to remember that Nepali stock prices reflect more than underlying value. They also register the market’s collective twitchiness—a system still learning how to stand steadily on its own two feet.
And for anyone tempted to see every wild swing as an opportunity, a final warning applies. In a market littered with falling knives and runaway kites, catching the move is usually less about skill than about luck. ■
