The aim of this report is to analyse the effects of various macroeconomic factors on two hypothetical stock markets, namely AG and MG. This is done through the regression analysis obtained by regressing stock prices against the different macro economic variables for the two stock markets. .
The macroeconomic variables are the independent variables and the stock prices are the dependent variables. The regression will analyse if the stock prices are "dependant- on the macroeconomic variables i.e. is there a statistically significant relationship between stock prices and certain macroeconomic factors. This statistical relationship can be used to deduce if and how macroeconomic factors affect stock market volatility.
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The assumption made in this report is that stock prices are different to stock returns. Stock prices are classed as the price the stocks are traded for and the stock return is the income from the stock usually expressed as the percentage of its cost. .
The macroeconomic variables under consideration are .
CPI : Consumer price index variable at time t.
TBR : Treasury bill interest rates variable at time t.
IP : Industrial production variable at time t.
FX : The exchange rate variable at time t.
MS : The money supply variable at time t.
Macroeconomic theory suggests that these variables can have an effect on stock price. The following are the suggested relationships between stock price and each macroeconomic factor:.
CPI: The CPI is also a measure of inflation in macroeconomic terms. The general theory suggests that there is a negative relationship between stock prices and inflation. If inflation is expected to increase then this could be seen as a bad sign for the state of the economy and hence stock prices will fall. This can be based on the basic idea of demand and supply. If the economy is seen to be heading for inflation then demand for stocks may fall hence causing a fall in price.