RESEARCH PAPERS ON THE IMPACT OF MACROECONOMIC VARIABLES ON STOCK PRICES

PAPER I

Relationship between Macroeconomic Variables and Singapore Stock Exchange

Summary: It starts with Efficient Market Hypothesis (EMH) which states that financial markets are informational efficient, i.e. , one cannot consistently achieve returns in excess of the average market returns on a risk adjusted basis, given the information publically available at the time the investment is made. There are 3 versions: 1. Weak: This says that Security Prices include the effect of all information publically available in the past. 2. Semi-Strong: Claims that Security Prices include both effects of information available in the past and they change instantly to any new information provided publically. 3. Strong: Claims that the prices reflect past information, new publically available information and they even reflect hidden or insider information. Weak and Semi-strong have evidences in their favour. But then this is said to be only theory as empirical evidence contradicts the EMH. For example, if EMH was true, then no investor would be able to make above normal returns consistently. Thus, the writer picks up one variable at a time and studies the hypothetisized relationship between Stock Prices and the variable making use of the Dividend Growth Model: P=D1/(k-g) Interest rates: Negative Relationship with Stock Prices. Lower Interest rates, higher corporate investment and higher expected profits. Higher expected future returns and higher price(g). Also, high irate, high cost of borrowing, stock transactions for you and me costly, lower demand, lower price(k). Inflation: Negative. Again, demand side factor. Will reduce AD, lower demand, also make investor borrowing costly, He will expect a higher rate of return and thus a higher K in the DD model above. Thus stock price will be lower. Exchange Rate: The relationship will depend on the relative importance of import/export. If currency appreciates , then the market will attract investments.
Nilay Pandey Metrics4 Analtics

Otherwise, say the country is a net exporter. A currency appreciation would mean that one unit of foreign currency, will pay less of home currency. Say, Rs/$ exchange rate is 45. For, every on dollar the US pays me, I will get Rs 45. Contract Finalized. Now, currency appreciates such that I get Rs. 40 for every $. I lose Rs. 5 every dollar. Thus. for a net exporter, appreciation leads to lower stock prices. Alternatively, a net importer will benefit from appreciation. Also, currency depreciation promotes exports by making goods cheaper to foreigners, any appreciation would hamper an exporting country and; currency appreciation promotes imports. US as net importer should benefit from appreciation. Methodology Vector Error Correlation Model. (VECM)

PAPER II Impact of Oil Prices on the Stock Market by Omar L Caban Summary: The entire stock market does not get equally or at the same time affected by the fluctuation in the oil prices. The US industrial sectors that get most affected with rise in oil prices are: 1. The cyclical Services sector gets most negatively influenced. They constitute the general retailers, support services, media, entertainment, leisure, hotels and transport. 2. The sector which follows next in order is Cyclical Consumer goods. These include household goods, textiles, automobiles and parts. 3. The next negatively influenced sector is the Financials. They comprise of investment companies, banks, life, assurance, insurance, real estate, specialty and other finance. Conclusion: Impact of oil prices on the stock market is inversely proportional. During an oil price rise, it is advisable to hold on to energy stocks shift focus from the mass market general retailers.

Nilay Pandey Metrics4 Analtics

PAPER III The Impact of Oil Price Shocks on the U.S. Stock Market by Lutz Kilian, University of Michigan and CEPR ,Cheolbeom Park, National University of Singapore Summary: Empirical evidence is mixed about whether the impact is negative or positive. This paper talks about how the impact on stock price is actually dependent on the cause of change in Oil Price. The cause can be: i. Demand side: a. Precautionary Demand: Negative Relation with Stock Price b. Commodity Driven Demand: Positive Relation with Stock Price ii. Supply Side, according to this research paper is not too important a factor as compared to the demand side factors. These structural shocks have very different effects on the real price of oil. For example, an unexpected increase in precautionary demand for oil causes an immediate and persistent increase in the real price of oil, an unexpected increase in aggregate demand for all industrial commodities causes a delayed, but sustained increase in the real price of oil, whereas unanticipated oil production disruptions cause a transitory increase in the real price of oil within the first year. Methodology: 1. trace fluctuations in the real price of oil to the underlying structural demand and supply shocks in the crude oil market 2. estimate the dynamic responses of U.S. stock market aggregates to these shocks. Further insights can be gained from responses of industry specific stock returns to demand and supply shocks in the crude oil market. Identify the sectors most sensitive to oil shocks and study the opportunities for adjusting ones portfolio in response to Oil market disturbances. Oil Prices are endogenous to the model Reverse Causality measurement PAPER IV The Stock Market Reaction to Oil Price Changes by Sridhar Gogineni, University of Oklahoma Summary: 1. Oil price changes most likely caused by supply shocks have a negative impact while oil price changes most likely caused by shifts in aggregate demand have a positive impact on

Nilay Pandey Metrics4 Analtics

the same day market returns. In addition to the returns of oil-intensive industries, returns of industries that do not use oil to any significant extent are also sensitive to oil price changes. 2. Large oil price changes over a one-day horizon and oil price changes during war periods have a large negative impact on the same day market returns. On the other hand, the stock market is positively correlated with small daily oil price changes. 3. Most large oil price changes over a one-day horizon are due to supply shifts, changes in expectations of future economic activity are likely spread out over time so that their impact on oil prices in any one day is small. 4. Oil prices are reported daily and since stock prices usually respond quickly to relevant public information, using daily data provides a more precise and timely measure of the impact of oil price changes on the market. While a number of studies examine the relation between oil price changes and the stock market over long horizons, if investors believe oil has an important impact on the economy, then oil price changes should impact the stock market almost immediately as stock prices usually respond very quickly to public information. Methodology: Obtain daily value-weighted returns of NYSE/NASDAQ index. Obtain daily cash price data of light crude oil. Match daily market returns with the corresponding oil returns. In depth Analysis.

PAPER V Mowry Summary:

Do Oil Prices Directly Affect the Stock Market by Andrea Pescatori and Beth

Oil prices and stock market performance might be negatively correlated due to: High transaction costs Inflation fears It is also possible to associate expensive crude with a booming economy as higher prices could reflect stronger business performance and increased demand for fuel. The data has been collected on Weekly basis, and the analysis infers that oil prices and the S&P 500 index do not exhibit any of the above mentioned phenomena. Many a time, they move in the opposite direction, many a time in the same.

Nilay Pandey Metrics4 Analtics

An in depth analysis on Daily, weekly and monthly data, matched with industries is called for as on the whole Oil impacts specific industries in a similar manner. Many a time, we do see news articles that Oil Price plummets stock markets, but that cannot be proved. Correlation Table has been made using two different samples to see the impact on specific industries and shows that: The majority of correlations computed for the different indexes and frequencies of data are relatively small or not significant, with the exception of the Dow Jones Transportation index.

Time Line
April 7 to April 10 April 11 to April 20 April 21 to April 28 April 28 onwards Structure the project/ finalise data Data Analysis and Initial findings Conclusion, Modelling if any possible Documentation

Nilay Pandey Metrics4 Analtics