Download - Stock market return
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Presented by-Yasha singh
4113007007
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• Relationship between Stock Market Returns, Inflationary Trends and real activity as it pertains to the Indian economy
• Investing in developing countries – taking stakes in their growth prospects
• The study examines fishers hypothesis and find results to be contingent upon the proxy employed for measuring expected inflation.
• Inflation is found to be a significant determinant of stock returns even after controlling for current and future activity.
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• Two hypothesis Examined :
• The Fisher Hypothesis nominal Stock returns and
inflationary expectations.
• The “proxy effect” hypothesis Fundamental macro
economic relation that characterize the economy.
• ARIMA (Autoregressive integrated moving average)
an autoregressive integrated moving average
(ARIMA) model is a generalization of an autoregressive
moving average (ARMA) model.
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• These models are fitted to time series data either to
better understand the data or to predict future points
in the series.
• ARIMA- based expectation model support the Fisher
hypothesis and the commonly held belief that
common stocks are a hedge against expected
inflation.
• The results also show that inflation is negatively
linked to both current and future real activity.
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• Monthly stock returns are derived from the
continuous compounding of the daily closing
prices of the BSENI.
• Period : April 1984 to December 1992.
• Data from PTI Stock scan Service, Bombay.
• Reasons: Equally weighted index of 100 stocks.
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• Express the relationship in joint hypothesis:
• Stock markets are efficient.
• Nominal return = expected real return + expected inflation rate
• Rt = α + βE(πt / Øt-1)+еt
• Rt – nominal return on market portfolio , π t – inflation rate
• E is expectations operator and Øt – information set available to
investor.
• If B=1 Asset or Portfolio is a perfect hedge against expected
inflation.
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• Real returns and expected inflation rate vary independent
of each other. This extension involves decomposing of
inflation rate into an expected and unexpected component.
• Rt = α + β1E(π t / Øt-1)+β2[(π t –E(πt/ Øt-1)]+nt’
• unexpected component=Realized inflation rate and
expected inflation rate.
• Regression of real Stock returns on current and future real
Activity.
• (Rt- Πt)= α + β∑Tt+I
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• Regression of inflation on current and future real
activity.
• Πt= α + β∑Tt+I
• Regression of real stock returns on inflationary
expectations and current and future real activity.
• (Rt- Πt)=α + β1E(Π)+ β2(Πt- E(Πt))+ β3∑Tt+i
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• After examining two inter-related economic issues
with respect to the Indian stock market
• Fisher “There is a contingency on proxy employed
in measuring inflationary expectations”.
• ARIMA “Stock holding offer a hedge against
expected inflation
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• It is contrary to oft-documented negative
relationship between stock return and inflation in
Developed economies
• Real stock returns are significantly positively related
to current real activity alone.