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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



May 2, 2011

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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May 2, 2011

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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May 2, 2011

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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May 2, 2011 5

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.



May 2, 2011

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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May 2, 2011

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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May 2, 2011

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



May 2, 2011

Why Oil prices, Money Supply and ExchangeRate?

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May 2, 2011

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



May 2, 2011

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



May 2, 2011

Time-Series Graphs

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May 2, 2011

Time-Series Graphs

13



May 2, 2011

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



May 2, 2011

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.



May 2, 2011

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.



May 2, 2011

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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May 2, 2011

Queries and Suggestions

Thank You

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