INTERIM PRESENTATION

By: SHINY ACHARYA

Corporate Mentor: Ms. Vasanta Tadimeti
Faculty Guide: Prof. M.Raja Shekhar Reddy

TCS Business Domain Academy

May 2, 2011 TCS Public

 Topics
ASSET REVIEW- Completed
• 5 Chapters From Investment Banking And Elements Of Capital Markets.
• 4 Chapters From Swift
• 5 chapters from Accounting and Reconciliation Concepts.

ASSET DEVELOPMENT-( In process)

• Question Bank Development of US Mortgages
• Certificate In UK Mortgages

May 2, 2011 2
 Research Project
(IMPACT OF MACRO-ECONOMIC FACTORS ON STOCK PRICES
AND A COMPARITIVE STUDY OF THE STOCK INDICES OF BRIC
COUNTRIES)
•Objectives:

•Co-integrating the macro-economic variables with the stock index by analyzing

data for 31 odd years from 1980 to 2010.

•Find the causal relationships among the macro-economic variables and stock
price indices.

•Establish the mathematical model explaining the relationship between the

variable and the stock price index.

•Comparative Analysis of the stock-price indices of BRIC countries.

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FINDINGS FROM THE EXISTING LITERATURE
Author Year Framework Findings

Chen, Roll 1986 Arbitrage Pricing Theory Reason for mispriced assets
and Ross predicted through an empirical
relation between interest rates,
inflation and industrial production.

Friedman 1988 Ando and Modigliani Wealth effect will dominate and
“Wealth effect and demand for money and stock prices
Substitution effect” will be positively related.

Dornbusch 1980 Portfolio balancing approach Exporting firms- exporting goods

and Fisher more attractive when local currency
depreciates.
Raman K 2002 Multi-variate vector error Establishes a causal relationship
Agrawalla correction model between share price index and
industrial production.
Findings on Amman Stock exchange, Singapore Stock exchange, Kuala Lumpur
Stock Exchange,

May 2, 2011 4
 Purpose of the Project

This study will add to the existing literature by providing robust results of how the

macro-variables are co-integrated with the stock index by analyzing data for 31 odd

years (1980 to 2010) and find the causal relationships among the macro-economic

variables and stock indices. A comparison of the stock indices of BRIC countries will

follow this study.

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 Variables Used
• 1. BSE SENSEX: Oldest Stock Exchange, enjoys being the financial capital. BSE
SENSEX or “BSE 30” is made of thirty scripts which is regarded as an
index of Indian Capital Market.
• 2. Money Supply: Given GDP and the prices, a certain amount of money is required to
carry out the economic activities. Serves both as a store of value and
medium of exchange.
• 3. Crude Oil Prices:

May 2, 2011 6
 Companies in BSE Sensex
RELIANCE INFOSYS ICICI BANK I T C LTD LARSEN & HOUSING HDFC BANK STATE BANK TCS LTD. ONG CORP
TECH L TOU DEVE LT OF INDIA LTD

12.18 10.28 7.82 6.4 5.86 5.81 5.34 5.28 4.58 3.25
 

BHARTI TATA STL TATA BHEL NTPC LTD MAHINDRA HINDALCO HIND UNI LT STERLITE IN JINDAL
ARTL MOTORS &M IN STEEL

3.09 2.85 2.83 2.4 1.97 2.12 1.89 2.16 1.73 1.94

WIPRO LTD. TATA BAJAJ AUTO MARUTISUZ CIPLA LTD. HEROHOND REL INFRA JAIPRAK DLF REL COM
POWER UK AM ASSO LIMITED LTD

1.89 1.35 1.29 1.22 1.1 1.03 0.63 0.64 0.63 0.44

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 Sector-wise Division
Autom   Techno   Banks &   FMCG   Oil    
obile logy Finance

TATA 2.83INFOSYS TECH 10.28ICICI BANK L 7.82I T C LTD 6.4RELIANCE 12.18 

MOTORS

MAHINDR 2.12TCS LTD. 4.58HOUSING DEVE 5.81HIND UNI LT 2.16ONG 3.25 

A&M CORP LTD

BAJAJ 1.29WIPRO LTD. 1.89HDFC BANK LT 5.34  8.56  15.43 

AUTO
MARUTIS 1.22  16.75STATE BANK O 5.28 
UZUK
HEROHON 1.03        24.25 
DA M

8.49                   
Real Estate Comm   Metal   Power   HE   Pharm  
a
LARSEN 5.86BHARTI ARTL 3.09TATA STL 2.85NTPC LTD 1.97BHEL 2.4CIPLA 1.1
& TOU LTD.

STERLITE 1.73REL COM LTD 0.44HINDALCO 1.89TATA 1.35       

IN IN POWER
JAIPRAK 0.64  3.53JINDAL 1.94  3.32       
ASSO STEEL
REL INFRA 0.63      6.68           

DLF 0.63                May  2, 2011   8

LIMITED
Why Oil prices, Money Supply and Exchange
Rate?

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 Methodology Adopted
• Phase 1: Choosing Variables
Independent variables: Money supply, exchange rate, inflation, interest rates, crude oil
prices, GDP of the country. Investment made by the FIIs is also considered from the
period 1991.
Dependent variable: BSE Sensex
Descriptive statistics and correlation matrix
LSENSEX LEXR LGDP LINFLATION LINT LMS LOP

Mean 3.329 1.407 3.062 0.882 1.157 3.723 1.412

Median 3.493 1.511 3.054 0.926 1.190 3.720 1.359
Maximum 4.312 1.687 3.517 1.142 1.276 4.706 1.961
Minimum 2.124 0.896 2.619 0.576 1.033 2.705 1.076
Std. Dev. 0.657 0.272 0.256 0.180 0.073 0.610 0.225

May 2, 2011 10
 Correlation Matrix
LEXR LGDP LINFLATI LINT LMS LOP LSENSEX
ON

LEXR 1 0.922 -0.463 -0.783 0.943 0.345 0.941

LGDP 1.000 -0.369 -0.831 0.997 0.633 0.973
LINFLATI 1.000 0.626 -0.411 -0.187 -0.325
ON
LINT 1.000 -0.848 -0.554 -0.743
LMS 1.000 0.595 0.974
LOP 1.000 0.543
LSENSEX 1.000

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Time-Series Graphs

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Time-Series Graphs

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Unit root test
• Ho: The variables used have a presence of Unit root.
• H1: The variables used do not have a unit root.

Variable ADF PP
Level Of Significance
t-stats
LSENSEX 0.5833 0.5922 Probability
LOP 0.879 0.879 1%
-3.79
LMS 0.5096 0.0431
0.0386
LINT 0.868 0.8886 5%
-3.66
LINFLATION 0.0943 0.114

LGDP 0.9979 0.9689 10%

-2.96
LEXER 0.0386 0.1227

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Johansen’s Co-integration Test
Ho: No co-integration equation exists between the variables used.
H1: There exists a co-integration equation between the variables.

Hypothesized Minimum Trace 0.05

No. of CE(s) Eigen value Statistic Critical Value Prob.**

None * 0.900815 206.1526 139.275 0

At most 1 * 0.854205 139.1403 107.347 0.0001

At most 2 * 0.715248 83.29932 79.3415 0.0243

At most 3 0.501941 46.87133 55.2458 0.2213

At most 4 0.418851 26.65729 35.0109 0.293

At most 5 0.268969 10.91759 18.3977 0.3963

At most 6 0.061216 1.831913 3.84147 0.1759

Trace test indicates 3 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level

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GRANGER CAUSALITY TEST
Pairwise Granger
Causality Tests
         
  Null Hypothesis: Obs F-Statistic Probability Accept
        Hypothesis
   GDP does not  29 0.09315 0.91139Accept 
Granger Cause  EXR
   EXR does not    0.26878 0.76658 
Granger Cause  GDP
         
   INFLATION does not  30 0.90588 0.41704Reject 
Granger Cause  EXR

   EXR does not    0.37205 0.69307 

Granger Cause  
INFLATION
         
   INT does not Granger  30 4.19322 0.02689Reject 
Cause  EXR
   EXR does not    3.34849 The Granger
0.05147Reject  Causality indicates
Granger Cause  INT
       
for which  of the variables causes a
   MS does not Granger  30 0.67711 change in the other variable or
0.51716Reject 
Cause  EXR
vice-versa. The higher the
   EXR does not    0.24757 0.78259 
Granger Cause  MS probability of F-statistics, higher is
the chance of accepting the null
Hypothesis.

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What Next?

• Apply multiple regression Analysis and read articles and understand the

reasons for the variation of economic variables

• Analyze the stock indices of the BRIC countries.

• Preparation of Final Report

• Submission of final report at TCS

• Submission of final report at college

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Queries and Suggestions

Thank You

May 2, 2011 18