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May 2, 2011 TCS Public
INTERIM PRESENTATION
By: SHINY ACHARYA
Corporate Mentor: Ms. Vasanta Tadimeti
Faculty Guide: Prof. M.Raja Shekhar Reddy
TCS Business Domain Academy
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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
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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 analyzingdata for 31 odd years from 1980 to 2010.
•Find the causal relationships among the macro-economic variables and stockprice indices.
•Establish the mathematical model explaining the relationship between thevariable 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, Rolland Ross
1986 Arbitrage Pricing Theory Reason for mispriced assetspredicted through an empiricalrelation between interest rates,inflation and industrial production.
Friedman 1988 Ando and Modigliani“Wealth effect andSubstitution effect”
Wealth effect will dominate anddemand for money and stock prices
will be positively related.
Dornbuschand Fisher
1980 Portfolio balancing approachExporting firms- exporting goodsmore attractive when local currencydepreciates.
Raman K
Agrawalla
2002 Multi-variate vector error
correction model
Establishes a causal relationship
between share price index andindustrial production.
Findings on Amman Stock exchange, Singapore Stock exchange, Kuala Lumpur Stock Exchange,
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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:
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Companies in BSE SensexRELIANCE INFOSYS
TECH
ICICI BANK
L
I T C LTD LARSEN &
TOU
HOUSING
DEVE
HDFC BANK
LT
STATE BANK
OF INDIA
TCS LTD. ONG CORP
LTD
12.18 10.28 7.82 6.4 5.86 5.81 5.34 5.28 4.58 3.25
BHARTI
ARTL
TATA STL TATA
MOTORS
BHEL NTPC LTD MAHINDRA
& M
HINDALCO
IN
HIND UNI LT STERLITE IN JINDAL
STEEL
3.09 2.85 2.83 2.4 1.97 2.12 1.89 2.16 1.73 1.94
WIPRO LTD. TATA
POWER
BAJAJ AUTO MARUTISUZ
UK
CIPLA LTD. HEROHOND
A M
REL INFRA JAIPRAK
ASSO
DLF
LIMITED
REL COM
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 DivisionAutom
obile
Techno
logy
Banks &
Finance
FMCG Oil
TATA
MOTORS
2.83INFOSYS TECH 10.28ICICI BANK L 7.82I T C LTD 6.4RELIANCE 12.18
MAHINDR
A & M
2.12TCS LTD. 4.58HOUSING DEVE 5.81HIND UNI LT 2.16ONG
CORP LTD
3.25
BAJAJ
AUTO
1.29WIPRO LTD. 1.89HDFC BANK LT 5.34 8.56 15.43
MARUTIS
UZUK
1.22 16.75STATE BANK O 5.28
HEROHON
DA M
1.03 24.25
8.49
Real Estate Comm Metal Power HE Pharm
a
LARSEN
& TOU
5.86BHARTI ARTL 3.09TATA STL 2.85NTPC LTD 1.97BHEL 2.4CIPLA
LTD.
1.1
STERLITE
IN
1.73REL COM LTD 0.44HINDALCO
IN
1.89TATA
POWER
1.35
JAIPRAK
ASSO
0.64 3.53 JINDAL
STEEL
1.94 3.32
REL INFRA 0.63 6.68
DLF
LIMITED
0.63 8
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Why Oil prices, Money Supply and ExchangeRate?
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Methodology Adopted
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• 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 theperiod 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
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Correlation Matrix
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LEXR LGDP LINFLATI
ON
LINT LMS LOP LSENSEX
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
ON
1.000 0.626 -0.411 -0.187 -0.325
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.
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Variable ADF PP
LSENSEX 0.5833 0.5922
LOP 0.879 0.879
LMS 0.5096 0.0431
LINT 0.868 0.8886
LINFLATION 0.0943 0.114
LGDP 0.9979 0.9689
LEXER 0.0386 0.1227
Level Of Significancet-stats
Probability1%
-3.790.0386
5%-3.66
10%-2.96
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Johansen’s Co-integration Test
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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Ho: No co-integration equation exists between the variables used.
H1: There exists a co-integration equation between the variables.
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GRANGER CAUSALITY TESTPairwise Granger
Causality Tests
Null Hypothesis: Obs F-Statistic Probability Accept
Hypothesis
GDP does not
Granger Cause EXR
29 0.09315 0.91139Accept
EXR does not
Granger Cause GDP
0.26878 0.76658
INFLATION does not
Granger Cause EXR
30 0.90588 0.41704Reject
EXR does not
Granger Cause
INFLATION
0.37205 0.69307
INT does not Granger
Cause EXR
30 4.19322 0.02689Reject
EXR does not
Granger Cause INT
3.34849 0.05147Reject
MS does not Granger
Cause EXR
30 0.67711 0.51716Reject
EXR does not
Granger Cause MS
0.24757 0.78259
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The Granger Causality indicates
for which of the variables causes a
change in the other variable or
vice-versa. The higher the
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
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