Methods of financial econometric analysis
Added on 2022-01-25
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FinanceData Science and Big DataCalculus and AnalysisStatistics and ProbabilityEconomics
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FINANCIAL ECONOMETRIC ANALYSIS
CIA – II & III
IMPACT OF EXCHANGE RATE AND INFLATION
RATE ON THE PERFORMANCE OF BSE SENSEX
Submitted by
VEDIKA CHOKHANI
2027660
Submitted to
Dr. Manu K S
MBA PROGRAMME
SCHOOL OF BUSINESS AND MANAGEMENT
CHRIST (DEEMED TO BE UNIVERSITY),
BENGALURU
SEPTEMBER 2021
CIA – II & III
IMPACT OF EXCHANGE RATE AND INFLATION
RATE ON THE PERFORMANCE OF BSE SENSEX
Submitted by
VEDIKA CHOKHANI
2027660
Submitted to
Dr. Manu K S
MBA PROGRAMME
SCHOOL OF BUSINESS AND MANAGEMENT
CHRIST (DEEMED TO BE UNIVERSITY),
BENGALURU
SEPTEMBER 2021
INTRODUCTION
Stock market is a platform where buyers and sellers trade in stocks and securities. Stock market
is a fundamental piece of the economy of a nation. The stock market plays a significant job in
the growth and development of the business and trade of the nation that in the end impacts the
economy of the nation.
A stock exchange is an exchange where stock dealers and brokers can purchase and sell
portions of stock, bonds, and different securities. Numerous organizations have their stocks
recorded on a stock exchange. This becomes attractive to investors as stocks are extremely
liquid in nature.
A stock market can be categorized as follows:
• Primary market : this is the platform where new stocks are iisued to the public for the
first time. Initial public offering (IPO), rights issue, private placement, etc are examples
of a primary market.
• Secondary market : this is the platform where investors trade in previously issued
securities without the actual involvement of the issuing company.
To issue shares, an organization needs to get listed to a stock exchange and through the primary
market of the stock exchange they can issue the shares and get the assets for business
prerequisites. There are sure standards and guidelines for getting listed at a stock exchange and
they have to satisfy a few criteria to issue stocks. This is the primary function of the stock
exchange and hence they assume the most significant job of supporting the development of the
business and trade in the nation. That is the explanation that a rising stock market is the
indication of a growing industrial sector and a developing economy of the nation.
The auxiliary capacity of the stock market is that the market assumes the job of a typical
platform for the buyers and sellers of these stocks that are listed at the stock market. It is the
auxiliary market of the stock exchange where retail speculators and institutional financial
specialists purchase and sell the stocks. As a matter of fact, it is these stock market dealers who
raise the capital for the organizations by putting resources into the stocks.
Since the stock market is extremely liquid in nature, the investors have assurance that their
investments can be converted into cash as and when they require. A stock exchange allows an
investor to convert hStock is an ownership in a company, with each share of stock denoting a
tiny piece of ownershipis/her long term investment into short term and medium term, thus an
investor can invest in a long term investment project without any hesitation. The stock market
functions as a stage through which savings and investments of people are channelized into the
Stock market is a platform where buyers and sellers trade in stocks and securities. Stock market
is a fundamental piece of the economy of a nation. The stock market plays a significant job in
the growth and development of the business and trade of the nation that in the end impacts the
economy of the nation.
A stock exchange is an exchange where stock dealers and brokers can purchase and sell
portions of stock, bonds, and different securities. Numerous organizations have their stocks
recorded on a stock exchange. This becomes attractive to investors as stocks are extremely
liquid in nature.
A stock market can be categorized as follows:
• Primary market : this is the platform where new stocks are iisued to the public for the
first time. Initial public offering (IPO), rights issue, private placement, etc are examples
of a primary market.
• Secondary market : this is the platform where investors trade in previously issued
securities without the actual involvement of the issuing company.
To issue shares, an organization needs to get listed to a stock exchange and through the primary
market of the stock exchange they can issue the shares and get the assets for business
prerequisites. There are sure standards and guidelines for getting listed at a stock exchange and
they have to satisfy a few criteria to issue stocks. This is the primary function of the stock
exchange and hence they assume the most significant job of supporting the development of the
business and trade in the nation. That is the explanation that a rising stock market is the
indication of a growing industrial sector and a developing economy of the nation.
The auxiliary capacity of the stock market is that the market assumes the job of a typical
platform for the buyers and sellers of these stocks that are listed at the stock market. It is the
auxiliary market of the stock exchange where retail speculators and institutional financial
specialists purchase and sell the stocks. As a matter of fact, it is these stock market dealers who
raise the capital for the organizations by putting resources into the stocks.
Since the stock market is extremely liquid in nature, the investors have assurance that their
investments can be converted into cash as and when they require. A stock exchange allows an
investor to convert hStock is an ownership in a company, with each share of stock denoting a
tiny piece of ownershipis/her long term investment into short term and medium term, thus an
investor can invest in a long term investment project without any hesitation. The stock market
functions as a stage through which savings and investments of people are channelized into the
gainful speculation proposition. In the long haul, it helps in capital improvement and financial
advancement for the country.
The stock market is very dynamic and comprehensive so it is obvious that along with domestic
factors the international macro- economic factors also affect the stock market.
A stock represents a person’s ownerhip in a company. The more shares a person owns, the
more potion of the company they own. The more shares they own, the more interest they
receive when the company makes a profit. In the financial world, ownership called equity.
There are two primary classes of stock. A person chooses a particular kind of stock depending
on what they expect in return from the investment. Preferred stock generally gives out regular
dividend payments to the shareholders and this is typically chosen as an investment by those
who want a regular income. Common Stocks represent ownership of a company and it offers
more rights and privileges as compared to preferred stocks. Investors may purchase stock on
the primary or secondary markets.
FUNCTIONS OF STOCK MARKET
• Safety of funds: all the transactions taking place in the stock market are well regulated
and all participants are required to work within a legal framework. This ensures safety
of funds in the market.
• Liquidity and marketability of securities: one of the main functions of a stock market
is to provide liquidity to the investors. It is a platform where securities are continuously
traded and hence assures the investors that their investments can be converted into cash
as and when they want.
• Facilitates economic growth: in stock exchange securities of different organizations
are purchased and sold. This procedure of disinvestment and reinvestment assists with
putting resources into most beneficial investment proposition and this leads to
economic growth and development.
• Flow of capital to profitable ventures: a stock market helps in channelizing the
savings of people into profitable ventures.
• Protection to investors: as only reputable and genuine organizations are listed on the
stock exchange, the interests and funds of the investors are protected.
• Promotion of investment: a stock market encourages people to save and invest more
by providing attractive investment options.
advancement for the country.
The stock market is very dynamic and comprehensive so it is obvious that along with domestic
factors the international macro- economic factors also affect the stock market.
A stock represents a person’s ownerhip in a company. The more shares a person owns, the
more potion of the company they own. The more shares they own, the more interest they
receive when the company makes a profit. In the financial world, ownership called equity.
There are two primary classes of stock. A person chooses a particular kind of stock depending
on what they expect in return from the investment. Preferred stock generally gives out regular
dividend payments to the shareholders and this is typically chosen as an investment by those
who want a regular income. Common Stocks represent ownership of a company and it offers
more rights and privileges as compared to preferred stocks. Investors may purchase stock on
the primary or secondary markets.
FUNCTIONS OF STOCK MARKET
• Safety of funds: all the transactions taking place in the stock market are well regulated
and all participants are required to work within a legal framework. This ensures safety
of funds in the market.
• Liquidity and marketability of securities: one of the main functions of a stock market
is to provide liquidity to the investors. It is a platform where securities are continuously
traded and hence assures the investors that their investments can be converted into cash
as and when they want.
• Facilitates economic growth: in stock exchange securities of different organizations
are purchased and sold. This procedure of disinvestment and reinvestment assists with
putting resources into most beneficial investment proposition and this leads to
economic growth and development.
• Flow of capital to profitable ventures: a stock market helps in channelizing the
savings of people into profitable ventures.
• Protection to investors: as only reputable and genuine organizations are listed on the
stock exchange, the interests and funds of the investors are protected.
• Promotion of investment: a stock market encourages people to save and invest more
by providing attractive investment options.
• Pricing of the securities: the prices of the securities are determined by the forces of
demand and supply in the market. These prices at the end of the day indicate the
performance of the companies.
• Mobility of funds: the stock exchange empowers both the investors and the
organizations to sell or purchase securities which leads to availability of funds. By this,
the money market additionally is enhanced as even short-term funds are accessible.
THE OBJECTIVES OF THE STOCK EXCHANGES
1. One of the main objectives of stock exchange is to protect the interest of the investors
who are dealing in the market.
2. To establish proper rules and regulations and promote honorable and just practices in
securities transactions.
3. To develop, maintain, and promote well-regulated market for dealing in shares and
securities.
4. To promote economic and industrial development through the process of efficiently
mobilizing resource by the way of investment in corporate securities.
5. To provide convenience to investors in trading in the market.
MARKET INDEXES
An Index is a comprehensive measure of market trends and patterns. It is useful for those
investors who are concerned with the movement of general stock market prices. Stocks with
high liquidity and market capitalization are included in an index. A weightage equivalent to its
market capitalization is assigned to each and every stock in an index. The index value
represents how the prices of stocks have moved over a period of time by comparing the present
day market capitalization with the base capitalization.
Sensex and Nifty are the two prominent Indian market indexes. Sensex includes the stocks of
the companies listed on the Bombay Stock Exchange (30 companies) and it is the oldest market
index for equities. It represents about 45% of the index's free-float market capitalization. It was
created in 1986 and provides time series data from April 1979, onward.
Another index is the Standard and Poor's CNX Nifty which includes shares of companies listed
on the NSE (50 companies). It represents almost 62% of its free-float market capitalization. It
was created in 1996 and provides time series data from July 1990, onward.
demand and supply in the market. These prices at the end of the day indicate the
performance of the companies.
• Mobility of funds: the stock exchange empowers both the investors and the
organizations to sell or purchase securities which leads to availability of funds. By this,
the money market additionally is enhanced as even short-term funds are accessible.
THE OBJECTIVES OF THE STOCK EXCHANGES
1. One of the main objectives of stock exchange is to protect the interest of the investors
who are dealing in the market.
2. To establish proper rules and regulations and promote honorable and just practices in
securities transactions.
3. To develop, maintain, and promote well-regulated market for dealing in shares and
securities.
4. To promote economic and industrial development through the process of efficiently
mobilizing resource by the way of investment in corporate securities.
5. To provide convenience to investors in trading in the market.
MARKET INDEXES
An Index is a comprehensive measure of market trends and patterns. It is useful for those
investors who are concerned with the movement of general stock market prices. Stocks with
high liquidity and market capitalization are included in an index. A weightage equivalent to its
market capitalization is assigned to each and every stock in an index. The index value
represents how the prices of stocks have moved over a period of time by comparing the present
day market capitalization with the base capitalization.
Sensex and Nifty are the two prominent Indian market indexes. Sensex includes the stocks of
the companies listed on the Bombay Stock Exchange (30 companies) and it is the oldest market
index for equities. It represents about 45% of the index's free-float market capitalization. It was
created in 1986 and provides time series data from April 1979, onward.
Another index is the Standard and Poor's CNX Nifty which includes shares of companies listed
on the NSE (50 companies). It represents almost 62% of its free-float market capitalization. It
was created in 1996 and provides time series data from July 1990, onward.
BOMBAY STOCK EXCHANGE (BSE)
The Bombay Stock Exchange (BSE) is an Indian stock exchange that was established in the
year 1875. It is Asia’s first stock exchange and it is located at Dalal Street, Mumbai.
Established in 1875. The world's 10th largest stock exchange, i.e., BSE has an overall market
capitalization of more than $2.2 trillion on as of April 2018. The first stock exchange to be
recognized by the Indian Government under the Securities Contracts Regulation Act was the
Bombay Stock Exchange.
The S&P BSE SENSEX index was developed in 1986 as a means for the BSE to measure the
overall performance of the exchange. Later in 2000, BSE then opened its derivatives market,
trading S&P BSE SENSEX futures contracts. BSE's trading platform expanded in 2001-02
with the develepment of S&P BSE SENSEX options along with equity derivatives. Not only
scientifically designed, the S&P BSE SENSEX or Sensitive Index is also based on globally
accepted construction and review methodology. S&P BSE SENSEX was first compiled in
1986 and it is a basket of 30 constituent stocks representing a sample of large, liquid and
representative companies. The base year of S&P BSE SENSEX is 1978-79 and the base value
is100. The index is generally reported in both local and worldwide markets through print just
as electronic media.
The free-float methodology is used presently to calculate the index but initially the calculation
was based on the "Full Market Capitalization" methodology. As per this methodology, the
level of index at any point of time reflects the Free-float market value of 30 component stocks
relative to a base period. Multiplying the price of is stock by the number of shares issued by
the company determines the market capitalization of a company. To determine the free-float
market capitalization this market capitalization is further multiplied by the free-float factor. It
provides the time series data from as early as 1979, which makes it the oldest index in the
country.
In the event that the Sensex moves up, it implies that the prices of the stocks of the majority of
the significant organizations on the Bombay Stock Exchange have gone up. Additionally, in
the event that it decreases, it demonstrates that the stocks of the organizations have gone down.
Since, the performance of these organizations hugy affect the financial development of India,
a fall in sensex can negatively affect the economy.
The Bombay Stock Exchange (BSE) is an Indian stock exchange that was established in the
year 1875. It is Asia’s first stock exchange and it is located at Dalal Street, Mumbai.
Established in 1875. The world's 10th largest stock exchange, i.e., BSE has an overall market
capitalization of more than $2.2 trillion on as of April 2018. The first stock exchange to be
recognized by the Indian Government under the Securities Contracts Regulation Act was the
Bombay Stock Exchange.
The S&P BSE SENSEX index was developed in 1986 as a means for the BSE to measure the
overall performance of the exchange. Later in 2000, BSE then opened its derivatives market,
trading S&P BSE SENSEX futures contracts. BSE's trading platform expanded in 2001-02
with the develepment of S&P BSE SENSEX options along with equity derivatives. Not only
scientifically designed, the S&P BSE SENSEX or Sensitive Index is also based on globally
accepted construction and review methodology. S&P BSE SENSEX was first compiled in
1986 and it is a basket of 30 constituent stocks representing a sample of large, liquid and
representative companies. The base year of S&P BSE SENSEX is 1978-79 and the base value
is100. The index is generally reported in both local and worldwide markets through print just
as electronic media.
The free-float methodology is used presently to calculate the index but initially the calculation
was based on the "Full Market Capitalization" methodology. As per this methodology, the
level of index at any point of time reflects the Free-float market value of 30 component stocks
relative to a base period. Multiplying the price of is stock by the number of shares issued by
the company determines the market capitalization of a company. To determine the free-float
market capitalization this market capitalization is further multiplied by the free-float factor. It
provides the time series data from as early as 1979, which makes it the oldest index in the
country.
In the event that the Sensex moves up, it implies that the prices of the stocks of the majority of
the significant organizations on the Bombay Stock Exchange have gone up. Additionally, in
the event that it decreases, it demonstrates that the stocks of the organizations have gone down.
Since, the performance of these organizations hugy affect the financial development of India,
a fall in sensex can negatively affect the economy.
GLOBAL FACTORS AFFECTING THE STOCK MARKET
The stock prices are affected by various factors of a company., both interna and external.
Internal factors include performance, earnings, top level changes, etc. Stock prices are also
influenced by a number of external factors like :
1. Economic factors: this includes factors like inflation, interest rates, changes in
economic policy, etc. Stock prices will rise when the interest rates have a significant
decline causing consumers and businesses to increase spending. Similarly, stock prices
will fall in case interest rates rise leading to decrease in spending by consumers and
busineses. Therefore, a lower interest rate causing a rise in the stock prices is favourable
as opposed to a higher rate.
2. Political factors: Political instability can have a mojor impact on stock prices. A
friendly government is favourable as they can help in significantly raising the prices.
On the other hand, a hostile government might affect the market negatively.
3. Natural calamities: natural calamities and hazards can lead to huge economic loss
which can have a negative affect the stock markets.
4. Investor sentiment: investor sentiment or confidence can also affect the market, which
can cause stock prices to rise or fall. The value of a stock can also be affected by the
general direction in which the stock market moves.
• Bull market – this denotes that the investor confidence is growing and the stock prces
are rising. It is a strong stock market which often signifies economic recovery or boom
and investor optimism.
• Bear market – this denotes that the investo confidence is low and the stock prices are
falling. It is a weak market and often signifies that the economy of the country is in a
recession and unemployment is high.
INFLATION
Inflation is the gradual loss of a currency's buying value over time. The increase in the average
price level of a basket of selected goods and services in an economy over time may be used to
calculate a quantitative estimate of the pace at which buying power declines. Inflation rate is
the rate at which a currency is depreciated, leading consumer prices to rise in proportion to the
change in currency value.
The stock prices are affected by various factors of a company., both interna and external.
Internal factors include performance, earnings, top level changes, etc. Stock prices are also
influenced by a number of external factors like :
1. Economic factors: this includes factors like inflation, interest rates, changes in
economic policy, etc. Stock prices will rise when the interest rates have a significant
decline causing consumers and businesses to increase spending. Similarly, stock prices
will fall in case interest rates rise leading to decrease in spending by consumers and
busineses. Therefore, a lower interest rate causing a rise in the stock prices is favourable
as opposed to a higher rate.
2. Political factors: Political instability can have a mojor impact on stock prices. A
friendly government is favourable as they can help in significantly raising the prices.
On the other hand, a hostile government might affect the market negatively.
3. Natural calamities: natural calamities and hazards can lead to huge economic loss
which can have a negative affect the stock markets.
4. Investor sentiment: investor sentiment or confidence can also affect the market, which
can cause stock prices to rise or fall. The value of a stock can also be affected by the
general direction in which the stock market moves.
• Bull market – this denotes that the investor confidence is growing and the stock prces
are rising. It is a strong stock market which often signifies economic recovery or boom
and investor optimism.
• Bear market – this denotes that the investo confidence is low and the stock prices are
falling. It is a weak market and often signifies that the economy of the country is in a
recession and unemployment is high.
INFLATION
Inflation is the gradual loss of a currency's buying value over time. The increase in the average
price level of a basket of selected goods and services in an economy over time may be used to
calculate a quantitative estimate of the pace at which buying power declines. Inflation rate is
the rate at which a currency is depreciated, leading consumer prices to rise in proportion to the
change in currency value.
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