Multiple Regression

Model Analysis
Todays stock market offers as many opportunities
for investors to raise money as Joe parodies to lose
it because market depends on different factors,
such as overall observed countrys performance,
foreign countries performance

Shubham Mishra
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Multiple Regression Model Analysis
Todays stock market offers as many opportunities for investors to raise money as Joe
parodies to lose it because market depends on different factors, such as overall observed
countrys performance, foreign countries performance, and unexpected events. One of
the most important stock market indexes is Standard & Poor's 500 (S&P 500) as it
comprises the 500 largest American companies
across various industries and sectors. Many
people put their money into the market to get
return on investment. Investors ask themselves
questions like how to make money on the stock
market and is there a way to predict in some
degree how the stock market will behave? There
are lots and lots of variables involved in how the
stock market behaves at a specific time. The
stock market is in a way an information agency.
Based on new information, whether good or bad
regarding almost everything from political
issues to interest rates and inflation, the stock market can go up or down. The market is
anticipating economic occurrences pro-actively, ignoring already occurred events that
were predicted before. This way it is very hard to predict how it is going to move in the
future. As S&P 500 is considered to be the most reliable benchmark for the
overall U.S. stock market, we decided to study what factor has the most impact on it. We
created two regression models and included the economic indicators, such as Consumer
Price Index, Producer Price Index, House Price index, Interest Rate, Unemployment
Rate, and Gross Domestic Product of some countries.

First Regression Model Specifications and Data

How accurately can we predict the stock market behavior? People working in the finance
industry have been trying to estimate or predict the behavior of stock market for a long
time, or maybe some of them already have a very long and complex model of predicting
the behavior of a stock market based on many factors and variables. We decided to use
the US economic indicators and the other countries GDP. With this research we are
hoping to find a statistically significant model that would describe what affects the stock
market. We used the average annual data from 1980 to 2011 to track the influence on
the US market. Our data is a time-series data. It is very interesting since within these 31
years there were a lot of changes in the countries economies, financial regulations and
policies.

At the very beginning, we assumed that the following factors may have influence on
stock market: S&P500 (Percentage Change) = 0 + 1 * (Annual CPI) + 2 * (Annual
Average PPI) + 3 * (Annual Average House Price Index) + 4 * (Annual Average
Interest Rate) + 5 * (Percentage Change of Annual Average GDP of US) + 6 *
(Percentage Change of Annual Average GDP of Spain) + 7 * (Percentage Change of
Annual Average GDP of Germany)
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1: Consumer Price Index reflects the state of inflation in the countrys economy. That
indicator is very important in the assessment of the stock market performance. If
inflation grows, the interest rate rises and this prevents the companies to borrow money
for further development of their businesses. This entire situation may hurt the stock
prices of the companies and thats why we wanted to see how big the impact is. We
assume that this variable is going affect the dependent variable a lot. 2: Producer Price
Index indicates early state of inflation. Therefore, if investors know that the PPI heralds
a strong economy with no increase in an interest rate, then they feel confident to invest
in the businesses what means increased positive activity in the market. We assume that
this variable is going to have some impact on the dependent variable however; it is not
going to be crucial.

3: House Price Index is an analytical tool for estimating changes in the rates of
mortgages. If mortgage rates are high, then housing market is weak because demand for
houses drops due to expensive loans, therefore HPI drops. In 2008 mortgage default
affected stock market very severely because before that period house prices went down
because people couldnt pay their mortgage payments and banks collapsed. Decrease in
house prices is one of the possible contributors to recession because the home owners
lose their equity in their houses. Considering such recession scenario, the stock market
always becomes bearish. Additionally, house market is considered more stable
investment than stock market. When stock market drops, people are willing in the
houses and HPI goes up. We assume that HPI and stock market shouldnt move in the
same direction thereby we dont take into consideration the complex scenario of 2008.

4: 10-Year Treasury Constant Maturity Rate impacts on the number of issued bond
and is used as risk free rate to calculate the excess return on the investment. It also has
an influence on the stock market.

5: Gross Domestic Product of the US is important for business profit and this can drive
the stock prices up. Investing in the stock market seems reasonable when the economy
is doing well. If the economy is growing fast then the stock market should be affected
positively, the investors are more optimistic about the future and they put more money
into market more. This variable is crucial for the dependent one.

6: Gross Domestic Product of Spain. Since Europe is currently in a recession, we

wanted to include the GDP of Spain, as one of the weakest economies in Europe now, to
check if there is any relationship between Spains economy and the US stock
market performance. Very small percentage of US investments goes to Spain. Compared
to Germany, which is the 5th country the USA invests into, Spain is the 31st country on
the list. There should not be any correlation between these two variables, so we included
Spains GDP into our regression to check our hypothesis.

7: Gross Domestic Product of Germany is an indicator of Germany is the 5th largest

economy in the world and is the largest European trade and investment partner of the
US. Germany is the largest economy in Europe and almost 1/5 of GDP of the European
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Union is that of Germany alone. We assume that this variable has to have an impact on
the US stock market.

Second Regression Model

S&P500 (Annual Average) = 0 + 1 * (Annual CPI) + 2 * (Annual Average House
Price Index) + 3 * (Annual Average Interest Rate) + 4 * (Average Annual
Unemployment Rate) + 5 * (Annual Average GDP of US) + 6 * (Annual Average GDP
of Germany) + 7 * (Annual Average GDP of China) After we run the regression of the
second model, it resulted in improving of our model accuracy. We excluded PPI, GDP of
Spain because it came out that these variables have no impact on the US stock market.
Also, we added the unemployment rate and GDP of China because it is the largest US
business partner.

Explanation of the new variables

Unemployment Rate is one of the most important factors of the economys performance.
High unemployment rate decreases the buyer power of the consumers. 2/3 of the US
economy is consumer based and it influences the stock market negatively. We assume
that there is a relationship between these two variables.

Gross Domestic Product of China affects the US economy because cheap export from
China prevents inflation in the US. China is a huge buyer of the US Treasuries. It lowers
the interest rate and companies borrow money to invest in development hence, it
directly affects the stock market. We assume that GDP of China and US stock market
move in the same direction, meaning if China does well, it has money to buy US
Treasuries. Additionally, the US stock market increases because production of those US
companies that is outsourced to China grows.

Report Content

Suppose you have applied for a business analyst position at a prestigious firm and as
part of their hiring process, you have been requested by the Recruitment Panel to
analyze the data for a presentation to be made to the Panel.

Prepare a report that summarizes your analysis, including key statistical results,
conclusions and recommendations. Your report must also include a complete analysis
and clear interpretation of each one of the coefficients contained in the two studied
models. Include any technical material that you feel is appropriate in the appendix

Data Resources

CPI

Consumer Price Index Data from 1913 to 2017

PPI
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http://www.statista.com/statistics/193966/annual-changes-of-the-
producer-price-index-for-commodities-in-the-us-since-1990/

HPI

https://research.stlouisfed.org/fred2/series/USSTHPI/downloaddata

10-year annual treasury constant maturity rate

https://research.stlouisfed.org/fred2/series/DGS10/downloaddata

US GDP

http://www.multpl.com/us-gdp-growth-rate/table/by-year

Other countries GDP

https://data.oecd.org/gdp/gross-domestic-product-gdp.htm

US Unemployment Rate

http://data.bls.gov/pdq/SurveyOutputServlet

Rubrics

As mentioned in the course outline explained during the first day of classes, the written
report would represent 20% of your total course score.

Kindly check the below rubrics to ensure you understand how the case study assignment
will be assessed. Make sure you summarize all your data in an excel file that
you will provide in the appendix at the end of your report.

Although its a take home assignment, just be aware that plagiarism is a form of
cheating. The penalty for plagiarism is a mark of zero and possible expulsion from the
course. As emphasized during the lecture, it is an individual assignment. Good luck!

Grading Rubrics for Case Study Report

Category of
requirement Description of Requirements

Structure, - Included all required parts

format, - Used proper format for cover page,
references table of contents, figures, references
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- The suggested format was used

- Ideas are conveyed efficiently and

clearly
Clarity of ideas - Text is well written grammatically

- Problem statement is specific and

clear
- Rationale is clear and logical
Problem - Research objectives are clear and
Statement and logical
Rationale - Hypotheses are clearly done

- Provided references are correctly

used
Literature - articles are relevant
Review or - a critical analysis is done with proper
references comparison

- Properly explains research design

- Instruments and data collection plan
Research are clearly explained
Design - Explains how data will be analysed

- Implication and limitations of the

research is explained
- Conclusion is precise an summarizes
Conclusion the results

Total