Effect of Economic Factors on Stock Price

Effect of Economic Factors on railway line PriceEffect Of Economic Factors On line of merchandise Price With A Particular Reference To swell of the United Kingdom Stock ExchangeIntroductionIts believed that an scotch atmosphere is a major factor in determine the primary trend of a melody commercialise. L H Beng (1998)The billet market, on the separate hand, is oft regarded as an effective and a reliable barometer of a countrys providence, and the clove pink expenses be deemed as a reproach of future expectations concerning the frugal well being of a country. Invariably, Stock, by its very nature, cannot be seen off as an independent entity from economic satisfyingities and per induceance. Consequently, it is of great raise to find surface or bear witness the birth mingled with some economic variables and the pricing of stocks in the capital of the United Kingdom stock exchange.This empirical vignette is carried out to examine the effect of economic factors on stock price with reference to FTSE100 price great power of capital of the United Kingdom stock Exchange. The main objective of the study is to examine some peculiarities or differences in terms of economic variables that bend stock prices in the capital of the United Kingdom stock market. The effects of sell gross sales baron, consumer price index and industrial product index (IPI) on stock prices shall be duly examined.The study makes use of backsliding modeling to analyze nine year (Jan. 2000 Nov. 2009) monthly info obtained on ftse100 price index and some place explanatory variables among other numerous variables that could be identified to determine stock prices in any economy. publications ReviewSeries of empirical studies have been carried out on the effect or influence of economic variables on the stock price. P I Ojeaga V O Folajin (2009) showed in their study that stock price correlated with the price of industrial product and composite price index, also strong ly related to the bonnie naira dollar exchange, market capitalization, broad money supply and maximum lending pasture in Nigeria economy.N F Chen, R Roll S A Ross (1986) argued that stock returns atomic number 18 exposed to systematic economic news, that they are priced in accordance with their exposures and that the news can be metred as innovations in area variables whose identification can be accomplished through simple and intuitive financial theory. The study was carried out with the use of efficient market theory and rational expectations inter temporal asset-pricing theory (Cox et al 1985). accord to the study, industrial production and changes in risk premium have a great influence on the stock returns time index of oil price changes showed no effect on the asset pricing.Abeyratna G, Anirut P and David M P (2004) displayed empirically in their study that at that place is a long run equilibrium race among the stock prices and the rate of inflation, the money supp ly and the Treasury bill rate in an emerging market of South Asia.Mukherjee and Naka (1995) applied Johansens (1998) VECM to analyze the kind amid the Japanese Stock foodstuff and exchange rate, inflation, money supply, true economic activity, long-term government bond rate, and call money rate. They think that a co integrating relation indeed existed and that stock prices contributed to this relation.R C Maysami, L C Howe and M A Hamzah (2004) concluded in their research study that Singapore stock market and the SES every last(predicate)-S Equities position indication formed significant relationships with all macroeconomic variables identified, small-arm the SES All-S Equities Finance Index and SES All-S Equities Hotel Index form significant relationships only with selected variables. Specifically, for the SES All-S Equities Finance Index, real economic activity and money supply were not significant, and in the case of SES All-S Equities Hotel Index, money supply, and shor t- and long-term interest rates were insignificant.Omran (2003) examined the impact of real interest rates as a key factor in the performance of the Egyptian stock market, both in terms of market activity and liquidity. The co integration analysis through error chastening mechanisms (ECM) indicated significant long haul and short-run relationships between the variables, implying that real interest rates had an impact upon stock market performance.Maysami and Koh(2000) studied and enounce out that inflation, money supply growth, changes in short- and long-term interest rate and variations in exchange rate formed a co-integrating relation with changes in Singapores stock market levels.As revealed to a higher place, two variables (index of industrial production and consumer price index) out three highlighted variables have been tested by earlier researchers and the allow fors showed a clear relationship with stock prices. In this study, the variables will be retested along side wi th retail sales index vis-a-viz London stock exchange.About The London Stock ExchangeThe London Stock exchange is the nearly classical exchange in Europe and one of the intumescentst in the world. It lists over 3000 Companies and with 350 of the companies coming from 50 disparate countries, the LSE is the most inter case of all exchanges.The London stock exchange is comprised of two different stock markets the main market and the alternative investment market (AIM). The main market is solely for established companies with high performance, and the listing requirements are strict. Approximately 1,800 of the LSEs company listings trade on the main market, and the total market capitalization of 37 Billion.The LSE is on the whole electronic, but different shares are traded on different systems. Highly liquid shares are traded using SETS change system on an order driven basis. This means that when a buy and sell price match, an order is automatically executed. For securities that t rade less(prenominal)(prenominal) regularly, the London stock exchange implements the SEAQ system, where market makers take for the shares liquid. These market makers keep are required to hold shares of a specific company and set the bid and ask prices, ensuring that there is market for the stock.The LSE also has a new and growing exchange for equity derivatives called EDX London, created in 2003. In 2004, EDX traded an norm of 382,599 contracts per day. It aim is to become the leading derivative market in the world (see http//www.advfn/stockexchanges/about/LSE/LondonStockExchange.html)Stock food marketA stock market is a public market for the trading of company stock and derivatives at an agreed price these are securities listed on a stock exchange as well as those on traded privately.The size of the world market was approximationd at about $36.6 trillion US at the lineage of October 2008. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organisation specialised in the business of bringing buyers and sellers of the organisation securities together. The stock market in the United States is NYSE while in Canada it is the Toronto stock exchange. Major European examples of stock exchanges embroil London Stock Exchange, Paris Bourse, and the Deutche Borse. Asian examples include the Tokyo stock exchange, the Hong kong stock exchange, and Bombay stock exchange. In Latin America, there are such exchanges as the BMF Bovespa and BMV (see http//en.wikipedia.org/wiki/stock_market).SecuritiesA security is a fungible, negotiable instrument representing financial value. Securities are broadly categorised into debt security (such as banknotes, bonds and debentures) and equity securities, e.g., common stocks and derivative contracts, such as forwards, futures, options and swaps. The company or other entity issuing the security is called the issuer (see http//en.wikipedia.org/wiki/security_(finance)).Stock trade Index The movement of the prices in a market or sections of a market are captured in price indices called stock market indices of which there many, e.g. S P, the FTSE and the Euro near indices. much(prenominal) indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include / exclude stocks in order to reflect the changing business environment (see http//en.wikipedia.org/wiki/stock_market).Ftse 100 IndexIt is a share index of the 100 most highly capitalized UK Companies listed on the London Stock exchange. FTSE 100 companies represent about 81% of the market capitalization of the whole London Stock Exchange. Even though FTSE All share index is more comprehensive, the FTSE 100 is by far the widely used UK stock market indicator (see http//en.wikipedia.org/wiki/FTSE_100Index).industrial Production Index (Ipi)The industrial production index is an economic indicator w hich measures real production output. It is expressed as a percentage of real output with base year. Production indexes are computed mainly as fisher indexes with the weights based on annual estimates of value added. This index, along with other industrial indexes and construction, accounts for the variation in national output over the duration of the business cycle (see http//en.wikipedia.org/wiki/industrial_production_index).Consumer Price Index (Cpi)CPI is a measure estimating the average price of consumer goods and services purchased by households. A consumer price index measures a piece change for a constant market of goods and services from one period to the next within the same area (city, region, or nation). It is a price index determined by step the price of a standard group of goods meant to represent the regular(prenominal) market basket of a typical urban consumer. The percent change in the CPI is a measure estimating inflation (see http//en.wikipedia.org/wiki/consumer _price_index). According to B Hobijn D Lagakos (2003) CPI is the benchmark measure of inflation.Retail Sales Index (Rsi)RSI is a monthly measuring rod of all goods sold by retailers based on a sampling of retail of retail stores of different types and sizes. The retail sales index is often taken as an indicator of consumer confidence. Many analysts choose to locution at the figure ex-auto (excluding the volatile car sales figure). It is thought that this number is a better measure of across-the-board purchasing trends. The report does not include money spent on services, so it represents less than half of total consumption during the month. However, even with these limitations the figures are closely watched as an indicator of the health of the economy (see http//www.investor intelligence activity.com/5768/retail_sales_index.html).Data And Methodology Of The ResearchDataIn this research bend, the data used are monthly market index data from Jan. 2000 to Nov.2009. Secondary data were obtained from yahoo finance (FTSE 100 index) and Office for national statistics (consumer price index, industrial production index and retail sales index). November data were not captured in the regression issuance because, data available for industrial production index does not cover November (the last data released was in October 2009).MethodologyThe method adopted is multiple regression model to analyse the quantitative relationship between ftse100 index and three explanatory variables i.e. index of industrial production, consumer price index and retail sales index. According to Gray Koop (2006, 2008 2009) infantile fixation quantifies the effect of an explanatory variable, X, on a dependent variable, Y. Hence, it measures the relationship between two variables.The relationship between Y and X is assumed to take the form, Y= + X, where is the intercept and is the set up of a straight line. This is called the regression line.The regression line is the best fitting line through an XY graph. No line will ever fit perfectly through all the points in an XY graph. The distance between each point and the line is called a residual. The ordinary least squares (OLS) estimator is the one which minimizes the sum of square residuals and provides estimates of and .Regression coefficient should be interpreted as marginal effects (i.e. as measures of the effect on Y of a small change in X. Thus, multiple regression model in this research work can be represented as Y=+ 1X1 + 2X2 + 3X3 +WhereY = stock price (ftse100 index) = intercept = coefficient for the explanatory variablesX1 = consumer price indexX2 = index of industrial productionX3 = retail sales index = Error (residual) indeed the estimated regression equation is thusY=+1X1+2X2+ 3X3The multiple regression correlation coefficient,R2,RY.X1X2X32=(Y-Y)2(Y-Y)2This a measure of the proportion of variability explained by the regression relationship model or the regression equation. Roughly, this means R2 is the percentage at which the model explains the changes in the dependent variable based on the independent variables. The standard deviation is the range of mountains at which there is +/- error with a 95% confidence level.In order to gauge the trueness of and estimates, the use of hypothesis testing on regression coefficients become very pertinent at 95% confidence interval. This is given asNull hypothesis H0 1 = 2 = 3 = 0 utility(a) hypothesis H1 1 2 = 3 = 0If the P-value is less than 5% (0.05) then t is large and the conclusion is 0. But, if the P-value is greater than 5% then t is small which means = 0.Analysis Of ResultsRegression Statistics binary R0.74673553R Square0.55761396Adjusted R Square0.54597222Standard Error588.751002Observations118Source Regression resultsThe value of R (multiple Correlation coefficients) obtained for the data is 0.75 which lies between 0 and 1 indicating a confirming relationship between stock price index and the selected economic variables (co nsumer price index, industrial production index and retail sales index).It is significant to note that out of all the possible economic indicators that affect stock prices, 56% of changes could be attributable to real production output, inflation and goods sold by retailers as shown by above regression results.CoefficientsStandard Errort StatP-valueIntercept-37034.9023685.920336-10.04772.15E-17CPI318.60854133.763038719.4366075.716E-16IPI226.10797220.4888188211.035681.053E-19RSI-131.0751219.96271818-6.5661.598E-09Source Regression resultsConsidering the model stipulation presented and utilizing the results obtained after running the data through Microsoft Excel 2007 the estimated regression model becomesSTOCK PRICES=-37034.90+318.61(CPI) +226.11(IPI)-131.08(RSI)The regression result above shows that there is a positive relationship between stock price and consumer price index (X1). This is in accordance with earlier expectation stated. Having P-value as 5.716E-16 i.e. its less than 5 %. It means 1 0 nil hypothesis will be rejected while alternative hypothesis is accepted. This indicates that parameter estimate is statistically significant, meaning that consumer price index has relevant influence in explaining stock price.P-value for X2 is 1.053 10-19 which is less than 0.05, this shows that the result is statically relevant, it means, index of industrial production has a positive relationship with stock price. Therefore, 0 null hypothesis should be rejected and accept alternative hypothesis.The above regression result shows a positive relationship between stock prices and retails sales index considering the P-value of 1.598E-09 which is less than 0.05. Statically, it shows that parameter estimate is very relevant and that, retail sales index contribute meaningfully to stock price determination in London stock exchange. Consequently, 3 0 null hypothesis must be rejected while pass judgment alternative hypothesis.ConclussionThis study examined the effect of economic factors on stock price the scope was limited to London stock exchange. As a result, FTSE 100 index was used as an independent variable while index of industrial production, consumer price index and retail sales index were examined as explanatory variables. It was deduced from the result of multiple regression model used that, there is a positive relationship between stock prices (as represented by FTSE 100 index) and the above listed economic variables most especially in the London stock Exchange. This by extension correlates with the results of some earlier researchers on the subject matter.In safe guarding stock prices in London stock exchange market, it becomes highly imperative and a major point of consideration for polity makers when trying to influence the economy through changes in economic variables such as the money supply, interest rates, or the exchange rate while aiming to correct economic ills such as inflation or unemployment to always access its multiplier effect which may inadvertently depress the stock market, and curtail capital formation which itself would lead to further slowdown of the economy.ReferencesAbeyratna G, Pisedtasalasai A Power D (2004), Macroeconomic influence on the stock market evidence from an emerging market in South Asia. 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