Developing and

analyzing an
econometric
model
Business Statistics

Satrajit Chakraborty
PGP-1 Sec-2 Roll No - 2008247
Analysis of share prices based on macroeconomic factors using Classical Linear Regression
Model (CLRM)
For the purpose of the study, the general macroeconomic theory has been used, which tries to
find out the effect of inflation and foreign portfolio investments (FII) on company’s performance
and how these two factors, coupled with market and sector-specific factors affect the share price
of a company.
Here, share prices of 5 banking stocks have been selected for analysis from April 2003 to March
2008 and the CLRM has been used, which tries to fit a linear least square regression estimate
between the dependant and independent variable. The results are then analyzed using EViews.
The independent variables are:
a) Index values of the BSE BANKEX INDEX over the time period. The base date for
BANKEX is 1st January 2002. The base value for BANKEX is 1000 points. BSE has
calculated the historical index values of BANKEX since 1st January 2002.
b) Inflation rate based on Wholesale Price Index (WPI) of all commodities. WPI Base Year
1993-94 = 100.
c) Cash Reserve Ratio, a statutory regulation set by RBI on Indian banks regarding
minimum reserves each bank must hold to customer deposits and notes to satisfy
withdrawal demands.
d) Net FII investments in Indian equity market over the time period to see how major FII
contributions towards share price fluctuations in India are.
The variables in the model are selected based on the relevance and importance of regulatory and
market factors which might affect share prices in banking sector in the long run. The result is
then analyzed using Econometric software package to see how much each factor in this model
actually influences the share price of each of the companies and what are the limitations of this
model and the data used. The 5 companies taken are STATE BANK OF INDIA (SBI), ICICI
BANK (ICICI), HDFC BANK (HDFC), AXIS BANK (AXIS) and PUNJAB NATIONAL
BANK (PNB).

2
Data used for the analysis
BANKE
DATE SBI ICICI HDFC AXIS PNB WPI CRR FII
X
Apr-03 278.55 121.40 246.35 44.35 118.20 1392.79 173.10 4.75 430.30
May-
352.30 137.65 245.05 52.25 179.40 1656.36 173.40 4.75 1220.80
03
Jun-03 384.20 150.20 258.95 48.70 155.10 1731.61 173.50 4.75 2581.70
Jul-03 421.85 158.60 266.55 80.15 169.65 1872.26 173.40 4.50 2346.50
Aug-03 439.25 179.50 275.45 73.30 171.90 2020.88 173.70 4.50 2091.30
Sep-03 451.60 204.35 275.15 71.20 186.55 2137.87 175.60 4.50 3851.30
Oct-03 484.20 248.10 316.35 74.75 202.80 2444.47 176.10 4.50 6797.50
Nov-03 470.75 249.90 302.45 83.75 184.70 2379.06 176.90 4.50 3300.50
Dec-03 538.50 295.70 366.65 135.15 241.35 2799.04 176.80 4.50 6161.10
Jan-04 595.80 295.25 344.70 160.35 257.30 2828.55 178.70 4.50 3176.80
Feb-04 585.30 271.80 374.55 140.50 242.95 2805.67 179.80 4.50 2397.50
Mar-04 605.70 295.90 378.35 146.75 333.90 2992.90 179.80 4.50 5604.40
Apr-04 642.60 315.20 375.90 155.15 375.10 3188.07 180.90 4.50 7638.20
May- -
465.00 230.35 352.55 107.60 261.45 2382.42 182.10 4.50
04 3246.90
Jun-04 430.65 244.40 369.70 129.60 281.95 2431.33 185.20 4.50 516.40
Jul-04 441.95 266.80 374.80 127.60 267.45 2539.53 186.60 4.50 913.60
Aug-04 442.85 269.45 367.40 119.05 265.10 2536.41 188.40 4.50 2892.30
Sep-04 468.20 286.05 402.85 129.95 259.45 2719.17 189.40 4.50 2385.60
Oct-04 447.35 299.00 414.35 152.50 245.05 2736.61 188.90 5.00 3263.30
Nov-04 529.70 340.20 495.30 166.50 348.50 3263.40 190.20 5.00 6740.80
Dec-04 652.45 370.75 518.85 185.20 405.20 3721.97 188.80 5.00 6683.80
Jan-05 642.80 360.60 564.40 206.20 408.25 3670.63 188.60 5.00 457.10
Feb-05 714.40 380.75 586.90 241.05 457.90 3916.46 188.80 5.00 8369.00
Mar-05 656.95 393.00 544.25 242.05 393.30 3847.96 189.40 5.00 7502.20
Apr-05 584.80 360.20 537.20 230.10 346.20 3504.33 191.60 5.00 -654.10
May- -
670.70 392.05 540.05 239.80 381.70 3803.40 192.10 5.00
05 1140.10
Jun-05 681.55 421.55 634.10 247.15 379.90 4014.42 193.20 5.00 5328.60
Jul-05 800.80 536.00 685.50 259.90 424.65 4764.91 194.60 5.00 7934.10
Aug-05 796.65 481.70 640.15 250.00 401.15 4468.51 195.30 5.00 5051.20
Sep-05 938.60 600.35 687.55 265.50 450.55 5125.01 197.20 5.00 4646.80
-
Oct-05 838.25 497.70 606.00 238.30 404.95 4425.36 197.80 5.00
3693.90
Nov-05 896.25 537.15 687.55 271.40 436.10 4789.72 198.20 5.00 4038.70
Dec-05 907.45 584.70 707.45 286.35 466.35 5081.71 197.20 5.00 9335.00

3
Jan-06 886.80 609.15 762.55 337.15 465.55 5254.89 196.30 5.00 3677.60
Feb-06 877.20 615.10 736.05 328.35 441.30 5204.69 196.40 5.00 7204.00
Mar-06 968.05 589.25 773.50 356.35 471.20 5265.24 196.80 5.00 6688.80
Apr-06 913.65 590.25 826.60 347.05 433.05 5245.79 199.00 5.00 521.90
May- -
831.00 536.05 740.20 285.80 405.40 4769.87 201.30 5.00
06 7354.20
Jun-06 727.40 487.40 791.15 266.75 325.55 4348.79 203.10 5.00 479.50
Jul-06 810.05 554.05 795.05 297.85 380.20 4781.14 204.00 5.00 1145.20
Aug-06 930.00 596.50 853.15 342.90 469.75 5308.01 205.30 5.00 4643.10
1028.3
Sep-06 699.05 926.00 379.20 526.20 6038.87 207.80 5.00 5424.70
0
1095.5 1004.0
Oct-06 776.85 433.75 518.45 6484.06 208.70 5.00 8013.10
0 5
1314.0 1118.4
Nov-06 871.45 474.05 544.75 7179.71 209.10 5.00 9380.10
0 0
1245.9 1069.7 -
Dec-06 890.40 469.05 506.95 7085.73 208.40 5.00
0 5 3667.40
1138.0 1078.1
Jan-07 940.50 534.00 508.15 7260.09 208.80 5.50 492.10
5 5
1039.1
Feb-07 831.90 932.60 460.00 424.25 6408.01 208.90 5.50 7655.30
5
-
Mar-07 992.90 853.10 949.40 490.15 471.65 6542.01 209.80 6.00
1082.00
1105.2 1026.1
Apr-07 865.90 467.85 503.40 6882.89 211.50 6.00 6679.20
5 5
May- 1352.4 1139.7
918.90 579.55 536.35 7607.35 212.30 6.50 3959.70
07 0 5
1525.3 1144.1
Jun-07 955.30 605.00 539.80 8009.94 212.30 6.50 1643.10
0 0
1624.5 1198.6 23872.4
Jul-07 927.05 626.70 514.75 8148.68 213.60 6.50
0 5 0
1599.5 1171.3 -
Aug-07 884.65 634.10 484.30 7858.79 213.80 7.00
0 0 7770.50
1950.7 1063.1 1439.0 16132.6
Sep-07 764.40 542.70 9469.26 215.10 7.00
0 5 5 0
2068.1 1257.0 1653.1 20590.9
Oct-07 918.80 525.70 10655.33 215.20 7.00
5 0 0 0
2300.3 1184.6 1719.0 -
Nov-07 931.25 601.85 10870.88 215.90 7.50
0 5 0 5849.90
2371.0 1232.4 1727.8
Dec-07 967.10 664.35 11418.00 216.40 7.50 5579.10
0 0 0
2162.2 1145.6 1568.0 1110.8
Jan-08 648.60 10713.91 218.10 7.50 -611.40
5 5 0 0
2109.7 1090.9 1453.4 1018.7
Feb-08 604.15 10113.73 219.90 7.50 2262.60
0 5 5 5
1598.8 1319.9
Mar-08 770.10 781.15 508.15 7717.61 225.50 7.50 -130.40
5 5

4
The share prices taken are the monthly closing price of the company and the BANKEX. The
WPI values are also monthly closing data. The FII values are the net FII in Equity market only
for the months specified. The CRR values are percentage of statutory bank deposits with RBI.

For all the values, log transformations have been taken, except the CRR value which is in
percentage. This was done as the Sum Squared Residual value was coming abnormally high, by
taking ordinary values, because of variations in the base of each variable.

Results and Analysis

Methodology and Assumptions
1) Used White’s heteroskedasticity consistent standard error estimates. The effect of
using White’s correction is that in general the standard errors for the slope coefficients
are increased relative to the usual OLS standard errors. This makes us more
“conservative” in hypothesis testing, so that we would need more evidence against the
null hypothesis before we would reject it and the estimates are close to Best Linear
Unbiased Estimate
2) 90% confidence level is taken for analysis purpose.
3) The normality of the data has been tested, as the CLRM is most useful for data with
normal distribution.
4) The results are analyzed after estimating the regression equation.
5) Discrepancies, if any, are noted and causes for the same are analyzed (like
heteroskedasticity, autocorrelation etc).
6) Finally the overall comparative analysis for each company is done

5
 Analysis for SBI
Histogram-Normality Test

12
Series: Residuals
Sample 2003M05 2007M10
10
Observations 39

8 Mean 1.03e-17
Median -0.001633
6 Maximum 0.096412
Minimum -0.098298
Std. Dev. 0.046059
4 Skewness 0.195208
Kurtosis 2.537333
2
Jarque-Bera 0.595540
Probability 0.742472
0
-0.10 -0.05 -0.00 0.05 0.10

Since the Skewness is almost zero and Kurtosis is less than 3, the data is normal.

Dependent Variable: DLOG(SBI)

Method: Least Squares
Date: 02/03/09 Time: 11:47
Sample (adjusted): 2003M05 2007M10
Included observations: 39 after adjustments
White Heteroskedasticity-Consistent Standard Errors & Covariance

Variable Coefficient Std. Error t-Statistic Prob.

C -0.083331 0.092132 -0.904477 0.3721

DLOG(BANKEX) 0.975892 0.105067 9.288257 0.0000
DLOG(FII) 0.004483 0.005199 0.862299 0.3946
DLOG(WPI) 0.349935 1.947027 0.179728 0.8584
CRR 0.017782 0.018411 0.965834 0.3409

R-squared 0.688807 Mean dependent var 0.065167

Adjusted R-squared 0.652196 S.D. dependent var 0.082533
S.E. of regression 0.048674 Akaike info criterion -3.088136
Sum squared resid 0.080551 Schwarz criterion -2.874858
Log likelihood 65.21864 F-statistic 18.81421
Durbin-Watson stat 1.677151 Prob(F-statistic) 0.000000

6
From this result, the conclusions are
a) There is significant relationship between the share price of SBI and the BANKEX index.
There seem to be no significant relationship between the dependant variable and FII,
WPI, CRR.
b) Around 65% variations in dependant variable are explained by variations in independent
variables.
c) The model is sound in explaining the overall significance of the independent variables on
the dependant variable as Prob (F-Statistic) is zero.
d) The Durbin-Watson test statistic is around 1.68, which shows that there is no significant
positive serial correlation in the model.
e) The linear regression equation is
DLOG(SBI) = -0.083 + 0.976DLOG(BANKEX) + 0.004DLOG(FII) +
0.349DLOG(WPI) + 0.017CRR

Analysis for ICICI

Histogram-Normality Test

6
Series: Residuals
Sample 2003M05 2007M10
5
Observations 39

4 Mean 9.96e-18
Median 0.004317
3 Maximum 0.063255
Minimum -0.084386
Std. Dev. 0.038659
2 Skewness -0.286813
Kurtosis 2.127258
1
Jarque-Bera 1.772431
Probability 0.412213
0
-0.05 0.00 0.05

Since the Skewness is almost zero and Kurtosis is less than 3, the data follows normal
distribution.

7
Dependent Variable: DLOG(ICICI)
Method: Least Squares
Date: 02/03/09 Time: 12:18
Sample (adjusted): 2003M05 2007M10
Included observations: 39 after adjustments
White Heteroskedasticity-Consistent Standard Errors & Covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.041186 0.061617 0.668423 0.5084

DLOG(BANKEX) 1.070291 0.106202 10.07784 0.0000
DLOG(FII) 0.000381 0.003767 0.101012 0.9201
DLOG(WPI) 1.132593 1.333488 0.849347 0.4016
CRR -0.008379 0.011999 -0.698336 0.4897

R-squared 0.784890 Mean dependent var 0.065925

Adjusted R-squared 0.759583 S.D. dependent var 0.083352
S.E. of regression 0.040869 Akaike info criterion -3.437660
Sum squared resid 0.056791 Schwarz criterion -3.224383
Log likelihood 72.03437 F-statistic 31.01473
Durbin-Watson stat 2.089395 Prob(F-statistic) 0.000000

From this result, the conclusions are

a) There is significant relationship between the share price of ICICI and the BANKEX
index. There seem to be no significant relationship between the dependant variable and
FII, WPI and CRR.
b) Around 76% variations in dependant variable are explained by variations in independent
variables.
c) The model is sound in explaining the overall significance of the independent variables on
the dependant variable as Prob (F-Statistic) is zero.
d) The Durbin-Watson test statistic is around 2.08, which shows that there is no serial
correlation in the model.
e) The linear regression equation is
DLOG(ICICI) = 0.041 + 1.070DLOG(BANKEX) + 0.0003DLOG(FII) + 1.136
DLOG(WPI) - 0.008CRR

8
 Analysis for HDFC
Histogram-Normality Test

9
Series: Residuals
8 Sample 2003M05 2007M10
7 Observations 39

6 Mean -5.60e-18
Median -0.001380
5
Maximum 0.092150
4 Minimum -0.115055
Std. Dev. 0.046486
3 Skewness -0.164158
Kurtosis 2.610191
2

1 Jarque-Bera 0.422083
Probability 0.809741
0
-0.10 -0.05 -0.00 0.05 0.10

Since the Skewness is almost zero and Kurtosis is less than 3, the data follows normal
distribution.

Dependent Variable: DLOG(HDFC)

Method: Least Squares
Date: 02/03/09 Time: 12:30
Sample (adjusted): 2003M05 2007M10
Included observations: 39 after adjustments
White Heteroskedasticity-Consistent Standard Errors & Covariance

Variable Coefficient Std. Error t-Statistic Prob.

C -0.068374 0.064753 -1.055905 0.2985

DLOG(BANKEX) 0.727538 0.136101 5.345596 0.0000
DLOG(FII) -0.014716 0.006504 -2.262608 0.0302
DLOG(WPI) -0.623383 1.571663 -0.396639 0.6941
CRR 0.014415 0.012859 1.120994 0.2701

R-squared 0.551686 Mean dependent var 0.040246

Adjusted R-squared 0.498944 S.D. dependent var 0.069428
S.E. of regression 0.049145 Akaike info criterion -3.068893
Sum squared resid 0.082116 Schwarz criterion -2.855615
Log likelihood 64.84341 F-statistic 10.45995
Durbin-Watson stat 2.830740 Prob(F-statistic) 0.000012

From this result, the conclusions are

9
 a) There is significant relationship between the share price of HDFC and the BANKEX
index and FII. There is no significant relationship between the dependant variable and
WPI and CRR.
b) Around 50% variations in dependant variable are explained by variations in independent
variables.
c) The model is sound in explaining the overall significance of the independent variables on
the dependant variable as Prob (F-Statistic) is zero.
d) The Durbin-Watson test statistic is around 2.83, which shows that there is no serial
correlation in the model.
e) The linear regression equation is
DLOG(HDFC) = -0.068 + 0.728DLOG(BANKEX) – 0.015DLOG(FII) –
0.623DLOG(WPI) + 0.014CRR

Analysis for AXIS

Histogram-Normality Test

12
Series: Residuals
Sample 2003M05 2007M10
10
Observations 39

8 Mean 1.49e-17
Median -0.012771
6 Maximum 0.363968
Minimum -0.204073
Std. Dev. 0.108238
4 Skewness 1.225139
Kurtosis 5.520367
2
Jarque-Bera 20.07868
Probability 0.000044
0
-0.2 -0.1 -0.0 0.1 0.2 0.3 0.4

Since the Skewness greater than zero and Kurtosis is greater than 5, the data does not normal
distribution and hence the CRLM seems not the best fit for analyzing AXIS Bank data. So, the
data analysis has not been shown. But the probable cause, as obtained from the Stability Test of
the model by Ramsey-Reset Test shows that some non-linear combinations of the explanatory
variables explains the exogenous variable, that is the CRLM is mis-specified.

10
Ramsey RESET Test:

F-statistic 0.031718 Probability 0.968810

Log likelihood ratio 0.077237 Probability 0.962118

So the null-hypothesis that all regression coefficients of the non-linear terms are zero is rejected,
that is the model suffers from mis-specification or lack of stability.

Analysis for PNB

Histogram-Normality Test

8
Series: Residuals
7 Sample 2003M05 2007M10
Observations 39
6
Mean 3.06e-17
5
Median -0.006095
4 Maximum 0.222010
Minimum -0.198445
3 Std. Dev. 0.083014
Skewness 0.342269
2 Kurtosis 3.503667

1 Jarque-Bera 1.173693
Probability 0.556078
0
-0.2 -0.1 -0.0 0.1 0.2

Since the Skewness is almost zero and Kurtosis is almost 3, it can be safely assumed the data
approximates normal distribution.

Dependent Variable: DLOG(PNB)

Method: Least Squares
Date: 02/03/09 Time: 12:57
Sample (adjusted): 2003M05 2007M10
Included observations: 39 after adjustments
White Heteroskedasticity-Consistent Standard Errors & Covariance

Variable Coefficient Std. Error t-Statistic Prob.

C 0.196965 0.107624 1.830120 0.0760

11
 DLOG(BANKEX) 1.449289 0.199477 7.265449 0.0000
DLOG(FII) 0.014258 0.008949 1.593236 0.1204
DLOG(WPI) -1.616152 2.191599 -0.737431 0.4659
CRR -0.045938 0.019881 -2.310652 0.0270

R-squared 0.615604 Mean dependent var 0.050667

Adjusted R-squared 0.570381 S.D. dependent var 0.133894
S.E. of regression 0.087761 Akaike info criterion -1.909184
Sum squared resid 0.261869 Schwarz criterion -1.695907
Log likelihood 42.22908 F-statistic 13.61260
Durbin-Watson stat 2.369202 Prob(F-statistic) 0.000001

From this result, the conclusions are

a) There is significant relationship between the share price of PNB and the BANKEX index,
FII and CRR but no significant relationship with WPI.
b) Around 58% variations in dependant variable are explained by variations in independent
variables.
c) The model is sound in explaining the overall significance of the independent variables on
the dependant variable as Prob (F-Statistic) is zero.
d) The Durbin-Watson test statistic is around 2.37, which shows that there is no serial
correlation in the model.
e) The linear regression equation is
DLOG(PNB) = 0.197 + 1.449DLOG(BANKEX) + 0.014DLOG(FII) –
1.616DLOG(WPI) - 0.046CRR

Comparative analysis

Model Selection
Schwarz criterion Adjusted R-squared Kurtosis
SBI -2.875 65% 2.53
ICICI -3.224 76% 2.12
HDFC -2.856 50% 2.61
AXIS NA NA 5.52
PNB -1.696 57% 3.50

12
This shows that the CRLM as developed here best fits ICICI Bank share price and is not well
applicable for explaining AXIS Bank share price variations over the time period April 2003 –
March 2008. Except for Axis Bank, which includes non-linear terms as per the Stability test, the
model quite well explains the share price fluctuations of the other 4 bank stocks, with no
heteroskedasticity or autocorrelation.

Impact of each variable chosen on the dependent variable at 90% confidence level
INDEX FII WPI CRR
SBI Significant Insignificant Insignificant Insignificant
ICICI Significant Insignificant Insignificant Insignificant
HDFC Significant Significant Insignificant Insignificant
PNB Significant Significant Insignificant Significant

This shows that the suitability of the individual parameter selection for the model is best for
PNB, whose prices have been affected significantly by 3 of the 4 parameters selected. Obviously,
the Index values are highly influencing the share prices of all the stocks. The WPI Inflation
parameter and CRR are not too significant. The Foreign Institutional Investment has significant
relationship in determining HDFC and PNB share prices, but surprisingly it is not having much
affect on SBI and ICICI share prices. This may be attributed to the seasonality affect, as SBI and
ICICI have a stable FII portfolio being major stocks and prior to October 2008, the FIIs did not
offload much of their investments in these 2 stocks. This analysis is up to March 2008.

General Conclusion
This study concludes that using CAPM model do not always serve the purpose in estimating
share price fluctuations, as other macroeconomic variables also influence them. But as seen, the
greater is the weightages of the stock in the Index or in other words, for stocks with high market
capitalizations, other factors tend to become more and more insignificant (viz. SBI and ICICI)
and the CAPM model becomes more relevant and accurate.
This study is a sincere attempt to study the complexity of stock price estimation and shows that
regression estimation models can be evolved with addition of new parameters and their effects
on the stock prices.

13
References
For data collection, macroeconomic factor studies and strategy for building econometric model,
following sources have been referred
1. ‘Introductory Econometrics for Finance’ © Chris Brooks 2008.
2. Macroeconomics – 9th Edition, Tata McGraw Hill by Rudiger Dornbusch, Stanley
Fischer, Richard Startz.
3. Working Paper on India’s Macroeconomic Performance and Policies since 2000 by
Shankar Acharya, October 2008, ICRIER.
4. Following websites

http://eaindustry.nic.in

http://www.rbi.org.in

http://www.indiastat.com/

http://www.bseindia.com

http://www.sebi.gov.in

http://finmin.nic.in

http://en.wikipedia.org
5. Prowess Database - http://www.cmie.com/database

14