PROJECT REPORT

on
QUANTITATIVE ANALYSIS OF LARGE STOCK
MARKET CRASHES
Submitted in partial fulfillment for the award of the degree

of
MASTER OF BUSINESS ADMINISTRATION

in
FINANCE
by
NEELANJAN MAITI

Under the guidance of

(Professor)

BENGAL INSTITUTE OF BUSINESS STUDIES

Ballygunge, Kolkata- 700019

MARCH 2020
 DECLARATION

I hereby declare that the study entitled "QUANTITATIVE

ANALYSIS ON LARGE STOCK MARKET CRASHES", is being

submitted by me as my final year dissertation project in the partial Fulfillment

of the requirement for the award of masters of business administration. The

study is based on secondary sources of data/ information.

The material borrowed from similar titles other sources and incorporated in

the dissertation has been duly acknowledged.

The matter embodied in this project report has not been submitted to any

other university or institution for the award of degree. This project is my

original work and it has not been presented earlier in this manner. This

information is purely of academic interest.

Signature Date:

(Bengal Institute of Business Studies)

 CERTIFICATE

To whomever it may concern

This is to certify that (Reg no. Of 2020-2021;

Roll no: ) a bonafide student of this college has completed his/her

dissertation as per guidelines. He/she has done this completely on his/her

own and it is an original work and not copied from any resource.

Thanking you.

Yours Truly,

Assistant Professor

Bengal Institute of Business Studies

 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my guide

as well as finance faculty Mrs. Sulakshana Sinha for his valuable

mentoring and inputs who gave me the golden opportunity to do this

wonderful project on the topic QUANTITATIVE ANALYSIS ON

LARGE STOCK MARKET CRASHES, which also helped me in doing a

lot of Research and I came to know about so many new things I am really

thankful to them.

Secondly, I would also like to thank my parents and friends who helped

me a lot in finishing this project within the limited time.

I am making this project not only for marks but to also increase my

knowledge on gradually transition of Indian economy in current scenario.

THANKS AGAIN TO ALL WHO HELPED ME.

NEELANJAN MAITI
 ABSTRACT

Stock market is considered the primary indicator of a country's economic

strength. Prices of stock market are volatile in nature and are affected by various

factors like inflation, economic growth, individual risk etc. Thus, the prices of a

share market are mainly driven by demand and supply. High demanding stocks

will see an increase in price whereas low demanding stocks will see a decrease

in price as they will be sold heavily. These significant drop in price if occurring

rapidly can lead to a stock market crash. occur due to some major catastrophic

events or an ongoing economic crisis or due to a collapse of a speculative bubble

which has been there for long enough to cause the damage. A crash is generally

considered when the majority of stocks decline rapidly and for a period of time.

In this report, we study and analyze the reasons behind the crashes and what were

the consequences. Among the many quantitative tools, we use regression analysis

which can be used to predict the market movement by analyzing the historical

data so that investors can anticipate the market and can make appropriate buy or

sell decisions.
 TABLE OF CONTENTS

SECTION TITLE PAGE

DECLARATION
CERTIFICATE
ACKNOWLEDGEMENT
ABSTRACT
LIST OF TABLES
LIST OF FIGURES
ABBREVATIONS
1 INTRODUCTION
1.1 OBJECTIVES
1.2 NECESSITY
1.3 SCOPE
1.4 INDIAN STOCK MARKET
1.5 SEBI AS A REGULATOR
1.6 STOCK MARKET CRASH
1.7 CONTRIBUTION OF ECONOMIES IN CRISIS
1.8 MAJOR GLOBAL INDICES
1.9 ALGORITHMIC TRADING
1.10 REGRESSION
2 LITERATURE REVIEW
3 RESEARCH OBJECTIVE
3.1 OBJECTIVES
4 RESEARCH METHODOLOGY
4.1 METHODOLOGY
5 RESEARCH ANALYSIS
5.1 CASE STUDY
5.2 REGRESSION ANALYSIS
6 LIMITATIONS AND FUTURE SCOPE
6.1 LIMITATIONS
6.2 FUTURE SCOPE
7 RECOMMENDATIONS
7.1 PROJECT RECOMMENDATIONS
8 CONCLUSION
9 ABSTRACT
 LIST OF TABLES
TABLE TITLE PAGE

5.1 Forecasted values of SENSEX

5.2 Forecasted values of DJIA
 LIST OF FIGURES
FIGURE TITLE PAGE

1.1 NIFTY vs India VIX

1.2 SENSEX vs S&P BSE Realized Volatility Index

1.3 Volatility of Indian vs International stock markets

4.1 Represents the methodology of the project

5.1 Fall of DJIA in 2008 and its recovery

5.2 Fall of SENSEX in 2008 and its recover

5.3 Fall of NIFTY in 2008 and its recover

5.4 Fall of DJIA from 2000-03 and its recovery

5.5 Fall of SENSEX from 2000-03 and its recovery

5.6 Predicted movement of SENSEX

5.7 Predicted movement of DJIA

 ABBREVIATIONS
DJIA : Dow Jones Industrial Average
VIX : Volatility India Index
ANN : Artificial Neural Networks
S&P : Standard and Poor
FTSE : Financial Times Stock Exchange
 CHAPTER 1

INTRODUCTION

1.1 OBJECTIVES
• Predicting market movements by using regression analysis which can help an
investor to make informed decisions
1.2 NECESSITY
• Stock market crash erodes investors’ wealth
• This project provides exposure on how to predict market movement more
accurately
• It allows the investor to make appropriate buy and sell decisions
1.3 SCOPE
• This project is carried out taking major global indices into consideration
• Regression analysis is used which is best suited for predicting markets
• A long time period is taken to ensure the accuracy of future predictions
1.4 INDIAN STOCK MARKET

Before liberalization, Indian economy was tightly controlled and protected by

number of measures like licensing system, high tariffs and rates, limited investment
in core sectors only. During 1980’s, growth of economy was highly unsustainable
because of its dependence on borrowings to correct the current account deficit. To
reduce the imbalances, the government of India introduced economic policy in 1991
to implement structural reforms. The financial sector at that time was much
unstructured and its scope was limited only to bonds, equity, insurance, commodity
markets, mutual and pension funds. In order to structure the security market, a
regulatory authority named as SEBI (Securities and Exchange Board of India) was
introduced and first electronic exchange, National Stock Exchange also set up. The
purpose behind this was to regularize investments, mobilization of resources and to
give credit.

There are two types of investors: those who are aware of the investment opportunities
available in India and those who are not. A stock market is a place where buyers and
sellers of stocks come together, physically or virtually. Participants in the market can
be small individuals or large fund managers who can be situated anywhere around the
globe. Investors place their orders to the professionals of a stock exchange who
executes these buying and selling orders. The stocks are listed and traded on stock
exchanges. Some exchanges are physically located, based on open outcry system
where transactions are carried out on trading floor. The other exchanges are virtual
exchanges whereas a network of computers is composed to do the transactions
electronically. The whole system is order-driven, the order placed by an investor is
automatically matched with the best limit order. This system provides more
transparency as it shows all buy and sell orders. The Indian stock market mainly
functions on two major stock exchanges, the BSE (Bombay Stock Exchange) and NSE
(National Stock Exchange). In terms of market capitalization, BSE stood at 10th
position with market capitalization of $2.05T as on November, 2018 and NSE at 11th
position with market capitalization of $2.03T as on November, 2018.

BOMBAY STOCK EXCHANGE

Bombay Stock Exchange is located on Dalal street, Mumbai. In terms of market
capitalization, BSE is the tenth largest stock exchange in the world as on 30th
November,2018. BSE is the oldest stock exchange in India. In the beginning during
1855, some stock brokers were gathering under Banyan tree. But later on when the
number of stock brokers increased, the group shifted in 1874. In 1875, the group
became an official organization named as “The Native Chor and Stock Brokers
Association”. In 1986, BSE developed its Index named as SENSEX to measure the
performance of the exchange. Initially, there was an open outcry floor trading system
which in 1995 was switched to electronic trading system. The exchange made the
whole transition in just fifty days. BSE Online Trading, which is known as BOLT is
an automated, screen-based trading platform. About 5000 companies are listed in
Bombay Stock Exchange. As far as Index Options trading is concerned, BSE is one
of the world’s leading exchanges. Some other services like risk management,
settlement, cleaning etc. The purpose of BSE automated systems and techniques are
to protect the interest of the investor, to stimulate market and to promote innovations
around the world. It is the first exchange across India and second across world to get
an ISO 9000:2000 certification.
NATIONAL STOCK EXCHANGE
The National Stock Exchange is located in Mumbai. It was incorporated in 1992
and became fully automated stock exchange in 1993. The basic purpose of this
exchange was to bring the transparency in the stock markets. It started its operations
in the wholesale debt market in June 1994. The equity market segment of the National
Stock Exchange commenced its operations in November, 1994 whereas in the
derivatives segment, it started it operations in June, 2000. It has completely modern
and fully automated screen-based trading system having more than two lakh trading
terminals, which provides the facility to the investors to trade from anywhere in India.
It is playing an important role to reform the Indian equity market to bring more
transparent, integrated and efficient stock market. As on November,2018 it has a
market capitalization of 2.03T. A total of 1635 companies are listed in National Stock
Exchange. The popular index of NSE, CNX NIFTY or NIFTY50 is extremely used
by the investor throughout India as well as internationally. It offers trading, settlement
and clearing services in equity and debt market and also in derivatives. It is one of
India’s largest exchanges internationally in cash, currency and index options trading.
There are number of domestic and global companies that hold stake in the exchange.
Some domestic companies include GIC, LIC, SBI and IDFC ltd. Among foreign
investors, few are City Group Strategic Holdings, Mauritius limited, Norwest Venture
Partners FII (Mauritius), MS Strategic (Mauritius) limited, Tiger Global five holdings,
have stake in NSE.
The National Stock Exchange replaced open outcry system, i.e. floor trading with the
screen based automated system. Earlier, the price information can be accessed only
by few people but now information can be seen by the people even in a remote
location. The paper-based settlement system was replaced by electronic screen-based
system and settlement of trade transactions was done on time. NSE also created
National Securities Depository Limited (NSDL) which permitted investors to hold
and manage their shares and bonds electronically through dematerialized account. An
investor can hold and trade in even one share. Now, the physical handling of securities
eliminated so the chances of damage or misplacing of securities reduced to minimum
and to hold the equities become more convenient. The National Security Depository
Limited’s electronically security handling, convenience, transparency, low
transaction prices and efficiency in trade which is affected by NSE which has
enhanced the reach of Indian stock market to domestic as well as international
investors.

STOCK MARKET VOLATILITY

To invest money in stock market is assumed to be risky because stock markets
are volatile. There is volatility in stock market because macro-economic variables
influence it and affect stock prices. These factors can affect a single firm’s price and
can be specific to a firm. On the contrary, some factors commonly affect all the firms.
For example, when stock market crashed on September 2008, the price of almost all
listed companies came down. Volatility is the variation in asset prices change over a
particular time period. It is very difficult to estimate the volatility accurately.
Volatility is responsible to make the stock market risky but it is this only which
provides the opportunity to make money to those who can understand it. It gives the
investor opportunity to take advantage of fluctuation in prices, buy stock when prices
fall and sell when prices are increasing. So, to take advantage of volatility it is need
to be understood well.
To invest money in stock market is assumed to be risky because stock markets
are volatile. There is volatility in stock market because macro-economic variables
influence it and affect stock prices. These factors can affect a single firm’s price and
can be specific to a firm. On the contrary, some factors commonly affect all the firms.
For example, when stock market crashed on September 2008, the price of almost all
listed companies came down. Volatility is the variation in asset prices change over a
particular time period. It is very difficult to estimate the volatility accurately.
Volatility is responsible to make the stock market risky but it is this only which
provides the opportunity to make money to those who can understand it. It gives the
investor opportunity to take advantage of fluctuation in prices, buy stock when prices
fall and sell when prices are increasing. So, to take advantage of volatility it is need
to be understood well.
If the performance of Indian stock market is seen during the last decade, NSE
peaked its volatility to 58 on India VIX in June,2015 whereas BSE peaked its volatility
to 500 on S&P BSE Realized Volatility index recently in February,2020. Currently
its volatility is above 50 which means the market is very unstable and uncertain and
difficult to predict the next movement
 Fig 1.1 NIFTY vs India VIX

Fig 1.2 SENSEX vs S&P BSE Realized Volatility Index

INDIAN AND INTERNATIONAL STOCK MARKETS

In the present era of liberalization, privatization and globalization, the
international investments and diversification of portfolio internationally is an
important issue, especially in the time period when stock markets are highly volatile.
Normally, people invest in the stock market with the purpose of earning returns. An
investor designs his portfolio in which he includes different stocks or group of stock
on sectoral basis to achieve his purpose of maximum returns with minimum risk.
International diversification can be an option as rationale behind this is that stock
returns within a county can be highly correlated because of similar environment but
internationally conditions can be different. On account of different factors like
economic condition, political stability, tax and tariff rates and inflationary conditions,
 there are chances that less correlation in stock returns across different countries is
possible.

In recent years, the interest in country fund especially in emerging economies

has increased. Emerging markets are an attractive place for investment because of
various reasons like open market system, liberal guidelines towards Foreign Direct
Investment and Foreign Institutional Investment. At the time of allocation of the funds
in internationally diversified portfolio, an investor would like to compare returns and
risk across different countries. The benefit of internationally diversified portfolio can
be enjoyed only when there is less correlation between international stock markets.
Further, while constructing internationally diversified portfolio of securities, the
correlation in the returns of stocks from two different countries required to be
calculated. According to a report by Morgan Stanley, Indian markets are about three
times more volatile as compared to other emerging markets and almost five times
more than the volatility in developed markets. Other emerging markets such as China,
Brazil and Russia have very less volatility in comparison to Indian market.

Fig 1.3 Volatility of Indian vs International stock markets

1.5 SEBI AS A REGULATOR

The Securities and Exchange Board of India (SEBI) is the regulatory body for
dealing with all matters related to the development and regulation of securities market
in India. SEBI was established on 12th of April in 1988. SEBI was given statutory
powers on 12 April 1992 through the SEBI Act, 1992. SEBI is managed by six
members-one chairmen (nominated by Central Government), two members (officers
 of central ministries), one member (from RBI) and remaining two members are
nominated by Central Government. The office of SEBI is situated at Mumbai with its
regional offices at Kolkata, Delhi and Chennai.
Some of the functions of SEBI are:

• To safeguard the interests of investors and to regulate capital market with

suitable measures.

• To regulate the business of stock exchanges and other securities market.

• To regulate the working of Stock Brokers, Sub-brokers, Share Transfer

Agents, Trustees, Merchant Bankers, Underwriters, Portfolio Managers
etc. and also to make their registration.

• To register and regulate collective investment plans of mutual funds.

• To encourage self-regulatory organisations.

• To eliminate malpractices of security markets.

• To train the persons associated with security markets and also to

encourage investors' education.

• To check insider trading of securities.

• To supervise the working of various organisations trading in security

market and also to ensure systematic dealings.

• To promote research and investigations for ensuring the attainment of

above objectives.

1.6 STOCK MARKET CRASH

A stock market crash is often a sudden and rapid event where there is a
significant drop in prices of stocks. A stock market crash can also occur due to some
major catastrophic events or an ongoing economic crisis or due to a collapse of a
speculative bubble which has been there for long enough to cause the damage. Public
reaction to all these can also cause a market crash. A downfall is generally considered
a crash when there is a decline of more than 10% over the past few days although
there is no specific threshold.
One of the biggest crashes in the past decade was when SENSEX crashed by
over by 1624 points and Dow Jones by 1300 points in 2015 as the fear of slowdown
in China rippled throughout the globe. Recently, due to fears of COVID-19, SENSEX
lost nearly 1450 points and Dow Jones nearly 3700 points. This damage was felt in
worldwide markets which caused stock exchanges in Europe and China to crash
dramatically with FTSE dropping 3.8% and DAX dropping 4.2% in one day.
The various causes of a stock market crash are:
• Speculation

Many market crashes can be blamed on rampant speculation. The point

is that when irrational euphoria between a certain asset class or industry
exists, it isn't uncommon for it to finish very badly. The crash in tech
stocks within the early 2000s followed a period of irrational speculation
in dot-com companies. And the crash of 2008 are often attributed to
investor speculation in land
• Excessive leverage
When things are going well, leverage can seem like an excellent tool.
Excessive leverage can create a downward spiral in stocks when things
turn sour. As prices drop, firms and investors with many leverages are
forced to sell, which successively drives prices down even further
• Interest rates and inflation

Generally speaking, rising interest rates are a negative catalyst for stocks
and therefore the economy generally. This is very true for income-
focused stocks, like land investment trusts (REITs). Investors buy these
stocks specifically for his or her dividend yields, and rising market
interest rates put downward pressure on these stocks. From an economic
standpoint, higher interest rates mean higher borrowing costs, which
tends to hamper purchasing activity, which may successively cause
stocks to dive. So, if the 30-year mortgage rate were to spike to, say, 6%,
it could dramatically hamper the housing market and cause homebuilder
stocks to require successful

• Political risks

While nobody features a ball, which will predict the longer term, it is a
safe bet that the stock exchange wouldn't love it much if the U.S. went to
 war with China. Markets like stability, and wars and political risk
represent the precise opposite. For instance, the Dow Jones Industrial
Average dropped by quite 7% during the primary trading session
following the Sept. 11, 2001, terror attacks, because the uncertainty
surrounding the attacks and therefore the next moves spooked investors.
• Tax changes

The tax cuts increase corporate earnings, and is likely to be a generally

positive catalyst for the market. On the opposite hand, tax increases can
have the other effect. One potential thanks to fix the Social Security
funding problem would be to boost payroll taxes on employees and
employers. There are several ways this might happen, but this is able to
mean lower paychecks for workers and better expenses for employers,
and will certainly be a negative catalyst. The same might be said if short-
term capital gains taxes or dividends lose their favorable treatment, if the
company tax is raised within the future, or if the other significant tax
hikes occur. This isn't likely to happen while the Republican Party is in
power, but it's certainly possible in the future.
• Panic

It's important to means that crashes aren't generally caused by one or

more of those factors all by themselves. It's typically a mixture of a
negative catalyst and investor panic that causes a pointy dive within the
stock exchange. For example, the steepest market drops during the
financial crisis occurred during September and October 2008. Yes, it had
been land speculation and excessive leverage that led to the difficulty ,
but fears that the U.S. banking system could potentially collapse sent
investors into a panic, which led to the particular crash.

The market crash effects both the economy and the individual investors on several
fronts:

• Wealth effect

The first impact is that people with shares will see a fall in their wealth.
If the fall is significant, it will affect their financial outlook. If they are
losing money on shares, they will be more hesitant to spend money; this
 can contribute to a fall in consumer spending. However, this effect should
not be given too much importance. Often people who buy shares are
wealthy and prepared to lose money; their spending patterns are usually
independent of share prices, especially for short-term losses. Also, only
around 10% of households own shares – for the majority of consumers,
they will not be directly affected by a fall in share prices. The wealth
effect is more prominent in the housing market. (e.g. falling house prices
affect more consumers)

• Effect on pension

Anybody with a private pension or investment trust will be affected by

the stock market, at least indirectly. Pension funds invest a significant
part of their funds in the stock market. Therefore, if there is a serious and
prolonged fall in share prices, it reduces the value of pension funds. This
means that future pension payouts will be lower. If share prices fall too
much, pension funds can struggle to meet their promises. The important
thing is the long-term movements in the share prices. If share prices fall
for a long time, then it will definitely affect pension funds and future
payouts. This may cause households to have lower pension income, and
they may feel the need to save more in other terms.

• Confidence

Often share price movements are reflections of what is happening in the

economy. E.g. a fear of a recession and global slowdown could cause
share prices to fall. The stock market itself can affect consumer
confidence. Bad headlines of falling share prices are another factor which
discourages people from spending. For example, the stock market falls
of 2008/09 reflected the fall in confidence. On its own, it may not have
much effect, but combined with falling house prices, share prices can be
a discouraging factor. However, there are times when the stock market
can appear out of step with the rest of the economy. In the depth of a
recession, share prices may rise as investors look forward to a recovery
two years in the future.
 • Investment

Falling share prices can hamper firm’s ability to raise finance on the stock
market. Firms who are expanding and wish to borrow often do so by
issuing more shares – it provides a low-cost way of borrowing more
money. However, with falling share prices it becomes much more
difficult.

• Bond market

A fall in the stock market makes other investments more attractive.

People may move out of shares and into government bonds or gold. These
investments offer a better return in times of uncertainty. Though
sometimes the stock market could be falling over concerns in government
bond markets

1.7 CONTRIBUTION OF ECONOMIES IN CRISIS

After Financial Crisis, whether the integration between emerging and developed
economies has increased or not, this issue is always getting attention from researchers
and academicians. Few studies are in favor that integration between developed and
emerging economies has increased after the financial crisis. Bahng (2003), who found
that the influence of other Asian markets has increased on Indian stock market during
and after the Asian Financial Crisis, this result gives an indication that Indian stock
market, is moving closer towards other Asian stock markets integration. Wong et al.,
(2004) highlighted that there was a trend of increasing interdependence between most
of developed markets and emerging markets after the 1987 market crash. After the
1997 financial crisis, the interdependence between these have gone more intensified
resulted into international diversification benefits reduction. Bose (2005), found
whether there are any common forces which driving the stock index of all economies
or there was some country specific factors which controlling the each individual
country’s economy. Indian stock market returns were highly correlated with the
returns of rest of Asia and US during post Asian crisis and till mid-2004. Not only
this, Indian stock market influenced some major Asian stock market returns. Co-
integration between India and other market in Asian region was not very high but
sufficient enough to design portfolio internationally. Huang (2013), supported that
after Asian financial crisis from 1997-1999, the stock markets integration not getting
 weekend rather it improved and getting stronger.

1.8 MAJOR GLOBAL INDICES

1.8.1 DJIA (Dow Jones Industrial Average)
The Dow Jones Industrial Average is an index which is created by Wall
Street Journal editor and Dow Jones & Company co-founder Charles Dow.
It is at present owned by S&P Dow Jones Indices. It was first published on
February 16, 1885. The averages are named after the name of Charles Dow
and one of his business associates, statistician Edward Jones. It shows how
30 large publicly owned companies based in the United States have done in
trading during a standard trading session in the stock market. Dow Jones
Industrial Average is the second oldest U.S. market index after the Dow
Jones Transportation Average. The Industrial part of the name is largely
chronological, as most of new modern 30 companies have little or nothing
to do with traditional heavy industry.
1.8.2 DAX (Deutscher Aktienindex)
The DAX is a blue-chip German stock market index of Frankfurt Stock
Exchange which consist of the 30 major German companies. DAX
measures the performance of the Prime Standard’s 30 largest German
companies by their volume and market capitalization. It is the alike FT30
and the Dow Jones Industrial Average, but because of its small assortment
it does not essentially represent the economy as whole.
1.8.3 Hang Seng
The Hang Seng Index is a free float-adjusted market capitalization index. It
is a weighted stock market index in Hong Kong. It is basically used to record
and observe daily variation in the prices of the largest companies of the
Hong Kong equity market. In Hong Kong, this is the main indicator of the
overall market performance in Hong Kong. The 48 component companies
of Hang Seng represent about 60% of market capitalization of the Hong
Kong Stock Exchange. It was started on November 24, 1969, and Hang
Seng Indices Company Limited is currently maintaining and compiling the
index. Hang Seng Indices Company Limited is a wholly owned subsidiary
of Hang Seng Bank, which is one of the largest banks listed in Hong Kong
in terms of market capitalization.
1.8.4 Nikkei 225
The Nikkei 225 more commonly called the Nikkei, the Nikkei index, or the
Nikkei Stock Average is a stock market index for the Tokyo Stock
Exchange (TSE). It has been calculated daily by the Nihon Keizai Shimbun
(Nikkei) newspaper since 1950. It is a price-weighted index (the unit is yen),
and the components are reviewed once a year. Currently, the Nikkei is the
most widely quoted average of Japanese equities, similar to the Dow Jones
Industrial Average. In fact, it was known as the "Nikkei Dow Jones Stock
Average" from 1975 to 1985. The Nikkei 225 began to be calculated on
September 7, 1950, retroactively calculated back to May 16, 1949. Since
January 2010 the index is updated every 15 seconds during trading sessions.
1.8.5 FTSE 100
The FTSE 100 Index, also called FTSE 100, FTSE, is a share index of
the 100 companies listed on the London Stock Exchange with the highest
market capitalization. It is one of the most widely used stock indices and is
seen as a gauge of business prosperity for business regulated by UK
company law. The index is maintained by the FTSE Group, a subsidiary of
the London Stock Exchange Group. The index began on 3 January 1984 at
the base level of 1000. The FTSE 100 consists of the largest 100 qualifying
UK companies by Total market value. The constituents of the index are
determined quarterly, on the Wednesday after the first Friday of the month
in March, June, September and December.
1.8.6 S&P BSE SENSEX
The Bombay stock exchange most popular index is S&P BSE SENSEX, the
sensitive index is also known as BSE30. It is an index which is free-float
and market weighted stock market index. BSE consist of 30 companies
which are well settled and financially very strong. These companies are
large and very actively traded stocks comprise different industrial sectors of
the Indian economy. SENSEX from its inception has become the major
indicator to see the health of Indian equity market. The base value of S&P
BSE SENSEX was decided to be 100 on 1st April. 1979 and the base year
taken was 1978-79. The 30 companies constituted BSE SENSEX index are
continually assessed and changed according to changes in their position so
that it can indicates the true market conditions.
1.9 ALGORITHMIC TRADING
Algorithmic trading is a process for executing orders utilizing automated and
pre-programmed trading instructions to account for variables such as price, timing and
volume. An algorithm is a set of directions for solving a problem. Computer
algorithms send small portions of the full order to the market over time. Algorithmic
trading makes use of complex formulas, combined with mathematical models and
human oversight, to make decisions to buy or sell financial securities on an exchange.
Algorithmic traders often make use of high-frequency trading technology, which can
enable a firm to make tens of thousands of trades per second. Algorithmic trading can
be used in a wide variety of situations including order execution, arbitrage, and trend
trading strategies.
Some of the benefits of algorithmic trading are:

• Trades are executed at the best possible prices.

• Trade order placement is instant and accurate (there is a high chance of

execution at the desired levels).

• Trades are timed correctly and instantly to avoid significant price

changes.

• Reduced transaction costs.

• Simultaneous automated checks on multiple market conditions.

• Reduced risk of manual errors when placing trades.

• Algo-trading can be back tested using available historical and real-time

data to see if it is a viable trading strategy.

• Reduced the possibility of mistakes by human traders based on emotional

and psychological factors.
Algorithmic trading can be applied in many forms of trading and investment
activities and some of its applications are:

• Mid to long term investors or buy side firms who purchase stocks in large
quantities but do not want to influence stock prices with discrete large
volume investments
 • Short term traders and sell participants who benefit from automated trade
execution in addition to creating liquidity

• Systematic traders who follow trends find it much more efficient to

program their trading rules and let the program trade automatically

1.10 REGRESSION
Linear Regression analysis found its way in the finance sector as a method in
modeling a single relationship by analyzing two different variables. The most
common variables used for creating this relationship are price and time. The
correlation between these two factors forming this relationship allows the modeling
of capital asset pricing and additionally applies to the concept of quantifying the risk
of investment. Regression models come in all shapes and sizes. Some of the important
models that are used in today’s trading environment are:

• Simple and multiple regression models

In simple linear regression a single independent variable is used to

predict the value of a dependent variable. In multiple linear
regression two or more independent variables are used to predict the
value of a dependent variable. The difference between the two is the
number of independent variables. In both cases there is only a single
dependent variable.

• Linear and non-linear regression models

Simple linear regression relates two variables (X and Y) with a straight

line (y = mx + b), while nonlinear regression must generate a line
(typically a curve) as if every value of Y was a random variable.
Nonlinear regression is a form of regression analysis in which data is fit
to a model and then expressed as a mathematical function

• Time Series and Cross-sectional models

Cross-sectional data are observations that come from different

individuals or groups at a single point in time. If one considered the
closing prices of a group of 20 different tech stocks on December 15,
1986, this would be an example of cross-sectional data. Time-series
 data is a set of observations collected at usually discrete and equally
spaced time intervals. The daily closing price of a certain stock recorded
over the last six weeks is an example of time-series data

• Artificial neural network models

Artificial Neural Network ANN is an efficient computing system whose

central theme is borrowed from the analogy of biological neural
networks. ANNs are also named as “artificial neural systems,” or
“parallel distributed processing systems,” or “connectionist systems.”
ANN acquires a large collection of units that are interconnected in some
pattern to allow communication between the units. These units, also
referred to as nodes or neurons, are simple processors which operate in
parallel.
 CHAPTER 2

LITERATURE REVIEW

Léon et al (2008), studied the relationship between expected stock market returns and

volatility in the regional stock market of the West African Economic and Monetary

Union called the BRVM. The study revealed that expected stock return has a positive

but not statistically significant relationship with expected volatility and volatility is

higher during market booms than when market declines.

Mubarak and Javid et al (2009), investigated the relationship between trading volume

and returns and volatility of Pakistani market. The findings suggested that there was

significance effect of the previous day trading volume on the current return and this

implied that previous day returns and volume has explanatory power in explaining the

current market returns.

Srinivasan and Ibrahim et al (2010), attempted to model and forecast the volatility of

the SENSEX Index returns of Indian stock market. Results showed that the symmetric

GARCH model performed better in forecasting conditional variance of the SENSEX

Index return rather than the asymmetric GARCH models, despite the presence of leverage

effect.

Karmakar et al (2007), investigated the heteroscedastic behavior of the Indian stock

market using different GARCH models. First, the standard GARCH approach was used

to investigate whether stock return volatility changes over time and if so, whether it was

predictable. Then, the E-GARCH models were applied to investigate whether there is

asymmetric volatility. It was found that the volatility is an asymmetric function of past

innovation, rising proportionately more during market decline.

Gupta et al (2013), aimed to understand the nature and different patterns of volatility in
Indian stock market on the basis of comparison of two indices which are BSE index,

SENSEX and NSE index, NIFTY. GARCH models were used to see the volatility of

Indian equity market and it was concluded that negative shocks do have greater impact on

conditional volatility compared to positive shocks of the same magnitude in both indices

i.e. SENSEX and NIFTY of the Bombay Stock Exchange and National Stock Exchange.

Gahan et al (2012), studied the volatility pattern of BSE Sensitive Index (SENSEX) and

NSE Nifty (Nifty) during the post derivative period. The various volatility models were

developed in the present study to get the approximately best estimates of volatility by

recognizing the stylized features of Stock market data like heteroscedasticity, clustering,

asymmetry autoregressive and persistence. When compared, it was found that there was

difference between the volatility of pre and post derivative period. Conditional volatility

determined under all the models for SENSEX and Nifty were found to be less in post

derivative period than that of the post derivative period.

Singh et al (2008), studied some of the issues related to the estimation of beta. It was

found that beta varies considerably with method of computation and the major reason for

variation seems to be the interval between data points. While the correlation between

weekly and daily betas was very high, this was not the case with weekly and monthly

betas. The variability of betas was higher with longer interval periods and more stocks

were classified as aggressive when monthly returns were used.

Srinivasan (2010) examined the random walk hypothesis to determine the validity of

weak-form efficiency for two major stock markets in India. He suggested that the Indian

stock market do not show characteristics of random walk and was not efficient in the weak

form implying that stock prices remain predictable.

Srinivasan et al (2010), examined the random walk hypothesis to determine the validity

of weak-form efficiency for two major stock markets in India. He suggested that the Indian
stock market do not show characteristics of random walk and was not efficient in the weak

form implying that stock prices remain predictable.

Bhat et al (2014), focused on analyzing and comparing the efficiency of the capital

markets of India and Pakistan. The results derived by using various parametric and non-

parametric tests clearly reject the null hypothesis of the stock markets of India and

Pakistan being efficient in weak form. The study provides vital indications to investors,

hedgers, arbitragers and speculators as well as the relevance of fundamental and technical

analysis as far as the trading/investing in the capital markets of India and Pakistan is

concerned. A gap is seen between the studies as some are in favor that Indian stock market

are weak form efficient while other are against it, so this gap helped in formulating another

objective which is to seek the weak form efficiency of Indian stock market.

Kiymaz and Berument et al (2003), investigated the day of the week effect on the

volatility of major stock market indexes. It was found that the day of the week effect was

present in both return and volatility equations. The highest volatility occurred on Mondays

for Germany and Japan, on Fridays for Canada and the United States, and on Thursdays

for the United Kingdom. For most of the markets, the days with the highest volatility also

coincided with that market’s lowest trading volume.

Chander and Mehta et al (2007), emphasized on that investors and analysts are unable

to predict stock price movements consistently so as to beat the market in informationally

efficient markets. It was seen whether anomalous patterns yield abnormal return

consistently for any specific day of the week even after introduction of the compulsory

rolling settlement on Indian bourses. The findings recorded for post- rolling settlement

period were in harmony with those obtained elsewhere in the sense that Friday returns

were highest and those on Monday were the lowest.

Chia and Liew et al (2010), studied the existence of day-of-the-week effect and
asymmetrical market behavior in the Bombay Stock Exchange (BSE) over the pre- 9/11

and post-9/11 sub-periods. They found the existence of significant positive Monday effect

and negative Friday effect during the pre-9/11 sub-period. Moreover, significant day-of-

the-week effect was found present in BSE regardless of sub- periods, after controlling for

time-varying variance and asymmetrical market behavior.

Sah et al (2010), believed the main cause of seasonal variations in time series data is the

change in climate. The study found that daily and monthly seasonality were present in

NIFTY and NIFTY Junior returns. It was found that Friday Effect in NIFTY returns while

NIFTY Junior returns were statistically significant on Friday, Monday and Wednesday.

In case of monthly analysis of returns, the study found that NIFTY returns were

statistically significant in July, September, December and January.

Swami et al (2011), investigated four calendar anomalies, viz., Day of the Week effect,

Monthly effect, Turn of the month effect and Month of the year effect across five countries

of South Asia. The day of the week effect, was found to exist in Sri Lanka and Bangladesh;

and the intra-month return regularity, in terms of Monthly effect and Turn of the month

effect, was present in the Indian market. The anomalous behavior was not pervading

across the five countries and there was little influence of one market over the other, so far

as calendar anomalies were concerned.

Kaur et al (2004), investigated the nature and characteristics of stock market volatility in

Indian stock market in terms of its time varying nature, presence of certain characteristics

such as volatility clustering, day-of-the-week effect and calendar month effect and

whether there existed any spillover effect between the domestic and the US stock markets.

It showed that day-of-the-week effect or the weekend effect and the January effect were

not present.

Dasgupta et al (2014), found only one co-integration, i.e., long-run relationships and also
short-run bidirectional Granger relationships in between the Indian and Brazilian stock

markets. It was found that the Indian stock market has strong impact on Brazilian and

Russian stock markets. The interdependencies (mainly on India and China) and dynamic

linkages were also evident in the BRIC stock markets. Overall, it was found that BRIC

stock markets are the most favorable destination for global investors in the coming future

and among the BRIC the Indian stock market has the dominance. On the basis of above,

it is seen that a gap is prevalent. This gave an origin to the objective of whether Indian

stock market is interdependent on international stock markets or not so that this gap can

be filled.

Paramati et al (2012), aimed to investigate the long-run relationship between Australia

and three developed (Hong Kong, Japan and Singapore) and four emerging (China, India,

Malaysia and Russia) markets of Asia. While bivariate Johansen co- integration test

provides results in supporting the long-run relationship between Australia-Hong Kong,

Australia-India, and Australia-Singapore in the post-crisis period, the causal relationship

from Australia to Asian markets disappears after the crisis. Results of VAR models

demonstrated that there is no consistent lead-lag association between the observed

markets.

Dhankar and Chakraborty et al (2007), investigated the presence of non-linear

dependence in three major markets of South Asia, India, Sri Lanka and Pakistan. It was

realized that merely identifying non-linear dependence was not enough. The application

of the BDS test strongly rejects the null hypothesis of independent and identical

distribution of the return series as well as the linearly filtered return series for all the

markets under study.

 CHAPTER 3

RESEARCH OBJECTIVE

3.1 OBJECTIVES
• To analyze the factors responsible behind a stock market crash
• To calculate the recovery time of a market after its crash
• To discuss practical implications of using quantitative tools
• To predict the market movement to make appropriate buy and sell decisions
 CHAPTER 4

RESEARCH METHODOLOGY

4.1 METHODOLOGY

4.1.1 Literature Survey

A literature survey is done by collecting the relevant information from

various books and journals. Different journals give us different insights so
as what is the current position and some suggestive ways to improve it

4.1.2 Timeline

A specific timeline of previous two decades (2000-2020) is selected for the

proposed project as it will cover the significant crashes which has happened
worldwide

4.1.3 Studying Cause and Effect

The various reasons for a market crash are studies thoroughly as well as the
consequences are also looked into so as to understand how the economy as
well as the various retail and institutional investor are affected

4.1.4 Quantitative Tool

For quantitative analysis, we have chosen the method of regression analysis

where the future movement will be predicted with the help of past
movements

4.1.5 Prediction

The various predictions are carried out which can determine whether ca
crash will occur or not in the near future
Literature survey: Books and journals required for the project are collected

A timeline is selected for proposed project

The responsible factors and the after effects of a crash are studied

A quantitative tool is determined and analysis is carried out

Prediction is carried out by using the tool

Figure 4.1 Represents the methodology of the project

 CHAPTER 5

RESEARCH ANALYSIS

5.1 CASE STUDY

5.1.1 Financial crisis of 2007-08

The stock market crash of 2008 was the biggest single-day drop in history
up to that point. The aftermath of this catastrophic financial event wiped out
big chunks of Americans’ retirement savings and affected the economy long
after the stock market recovered. The financial turmoil caused by the crisis
impacted many sectors, leading to massive job losses and mortgage defaults.
As investment firms collapsed and automakers stood on the verge of
bankruptcy, the federal government stepped in and “bailed out” company
after company.

The various causes of this crisis were:

• Mild recession in the Federal Reserve

Federal reserve or the Central bank was facing a mild recession

since 2001 which resulted in the reduction of federal funds rate
from 6.5% to 1.75%. this reduction enabled the bank to extend
the consumer credit at a lower prime rate and to lend to subprime
or high-risk customers. This attracted many customers with a
lower credit score to borrow money for purchasing durable goods
especially real estate. This accelerated the prices of real estate
thus causing the housing bubble.

• Mortgage loans to subprime customers

The changing scenario of banks helped them to offer the subprime

mortgage loans that are either structured with the balloon
payments or with adjustable interest rates. The increase I the
prices of real estate helped the subprime borrowers to protect
themselves from the high mortgage payment with different
options like offerings like re-financing, borrowing against the
increased value etc. in such a case the bank can repossess the
 property and sell it at a higher price than the original loan. Which
encouraged many banks to market subprime loans to customers
having poor credit scores.

• Widespread practice of securitization

Securitization is a practice of polling together different types of

debt like mortgages and other loans of customers and selling them
as bonds to investors. Such bonds that consist of mortgage are
known as mortgage backed securities or MBS. Selling and buying
MBS was considered good as it increased the liquidity thus
reducing the exposure to risky loans while the purchased MBS’
helped banks to diversify the portfolio and earn money

• Weakening of net capital requirement

The Glass Steagall Act of 1933 allowed banks, securities firm and
other insurance companies to enter into each other’s markets
resulting in the formation of the bank that was too big to fail.
Also, the SEC in 2004 weakened the capital requirements thus
encouraging the bank to invest more money in MBS. Although
the decision took by SEC resulted in enormous profit but it also
exposed the portfolio to a significant risk.

• Rating agencies

One of the main reasons of this crisis were the rating agencies
who classified subprime securities as investment grade. Part of it
was incompetence and part of it was conflict of interest as the
rating agencies were paid by issuers to rate the securities.

• Stability in the economy growth

The long prevailing stable economic condition and Great-

Moderation convinced many executives, government officials
and economists that led to the major ignorance of the discount
clear-signs of the impending crisis. Thus, the banks and other
financial institutions continued the practice of reckless lending,
borrowing and securitization.
The consequences of the aftermath were not only felt in USA but it rippled
throughout the globe. Some of the major consequences were:

• Unemployment rate peaked

The unemployment rate peaked at 10% as around 8.7 million

people lost their jobs and many experienced a sharp decline in
their retirement savings that contributed to the compounded
unemployment and housing instability

• Verge of bankruptcy of biggest automakers

The three biggest automakers namely General Motors Company,

Chrysler LLC and Ford Motor were on the verge of bankruptcy.
Among them, Ford Motor received a bailout from the Term Asset
Backed Securities Laon Facility while the other two were taken
over by the federal government

• Bankruptcy of Lehmann Brothers

The venerable Wall Street brokerage firm Lehman Brothers

became the largest victim of the subprime mortgage crisis when
they declared bankruptcy as they had a debt of more than $600
billion. It was the largest bankruptcy filing in U.S. history

• Global indices hit bottom

The Dow Jones Industrial Average plunged by 54% from its high
to 6440 points in the first quarter of March,2009 which was its
all-time low. Both SENSEX and NIFTY crashed by 60% to 8000
points and 2500 points respectively in the first quarter of march

• Wealth wipe out

The stock market erased $7 trillion in shareholders’ wealth and

the US homeowners lost a cumulative of $3.3 trillion in home
equity amounting to a total loss of $10.3 trillion. It also wiped out
more than $2 trillion of Americans’ retirement savings

• Recovery

The crashes continued till the first quarter of the following year
and all the major indices took about 5-6 years to recover from
their all-time lows to their previous highs

Fig 5.1 Fall of DJIA in 2008 and its recovery

Fig 5.2 Fall of SENSEX in 2008 and its recovery

Fig 5.3 Fall of NIFTY in 2008 and its recovery

5.1.2 Dot com bubble of 2000

The dot-com crisis, also known as dot-com bubble refers to a four-year

period (1997-2001) during which the stock prices soared high in the Internet
and technology sectors of the Western nations. The companies followed a
business model called “Network effect” by which the companies gained
more market share but without actually making any profit or revenue at all.
Because of the large market share of the companies, the stake holders were
given a false image that the companies were making huge profits. The rating
agencies also gave false speculations on the individual stocks. So, the were
highly overvalued creating the bubble. The dot-com crisis had an effect not
only on the economy of USA but also the rest of the world. The various
reasons of this bubble burst were:

• The Use of Metrics That Ignored Cash Flow

Many analysts focused on aspects of individual businesses that

had nothing to do with how they generated revenue or their cash
flow. For example, one theory is that the Internet bubble burst due
to a preoccupation with the “network theory,” which stated the
value of a network increased exponentially as the series of nodes
(computers hosting the network) increased. Although this concept
made sense, it neglected one of the most important aspects of
valuing the network: the ability of the company to use the network
to generate cash and produce profits for investors.

• Significantly Overvalued Stocks

In addition to focusing on unnecessary metrics, analysts used very

high multipliers in their models and formulas for valuing Internet
companies, which resulted in unrealistic and overly optimistic
values. Although more conservative analysts disagreed, their
recommendations were virtually drowned out by the
overwhelming hype in the financial community around Internet
stocks.

As the prices of dot-com stocks peaked, the bubble burst and the slide
began. The consequences of this burst were:
• Dot com companies went bankrupt

The stock prices of many dot-com startups like Priceline, eToys

plummeted to almost zero within a day and their valuation
vanished overnight

• Global indices meltdown

The Dow Jones Industrial Average declined by around 40% to

7200 points over a span of three years from 2000-2003 which also
includes the 9/11 attack on Pentagon. NIFTY also fell by more
than 50% to 850 points over a span of two years after the bubble
burst

• Wealth wipe out

The market wiped out a total of $5 trillion dollar from as many as

100 million individual investors

• Recovery

The crashes continued for the next couple of years before all the
major indices could recover and regain to their previous highs

Fig 5.4 Fall of NIFTY from 2000-03 and its recovery

 Fig 5.5 Fall of DJIA from 2000-03 and its recovery

5.2 Regression Analysis

Out of the various available methods, regression analysis is used for this purpose
as it is one of the widely used methods to predict the market movements. This is
carried out in Excel.

For predicting the future point movement of SENSEX, the historical monthly
closing of 20 years is taken into consideration. An equal time interval is taken. The
data is exported to excel and then taking the data range of Timeline and Values,
forecast analysis was carried out. A confidence interval of 95% was considered and
the upper and lower confidence bounds were defined. The forecast was done for the
next five years and accordingly the chart and table were prepared displaying the
monthly closing prices

Table 5.1 Forecasted values of SENSEX

Timeline Values Forecast Lower Confidence Upper Confidence
Bound bound
1-Dec-19 41253.74 41253.738 41253.74 41253.74
1-Jan-20 41367.819 39485.23 43250.40
1-Feb-20 41519.346 38985.33 44053.37
1-Mar-20 41670.873 38620.50 44721.25
1-Apr-20 41822.4 38330.31 45314.49
1-May-20 41973.927 38089.21 45858.64
1-Jun-20 42125.454 37883.55 46367.36
1-Jul-20 42276.981 37705.01 46848.95
1-Aug-20 42428.508 37548.09 47308.92
1-Sep-20 42580.035 37408.92 47751.15
1-Oct-20 42731.562 37284.64 48178.48
1-Nov-20 42883.089 37173.11 48593.06
1-Dec-20 43034.616 37072.64 48996.59
1-Jan-21 43186.144 36981.87 49390.41
1-Feb-21 43337.671 36899.72 49775.62
1-Mar-21 43489.198 36825.26 50153.13
1-Apr-21 43640.725 36757.76 50523.69
1-May-21 43792.252 36696.55 50887.95
1-Jun-21 43943.779 36641.10 51246.46
1-Jul-21 44095.306 36590.91 51599.70
1-Aug-21 44246.833 36545.59 51948.08
1-Sep-21 44398.36 36504.76 52291.96
1-Oct-21 44549.887 36468.11 52631.67
1-Nov-21 44701.414 36435.34 52967.49
1-Dec-21 44852.941 36406.21 53299.68
1-Jan-22 45004.468 36380.48 53628.46
1-Feb-22 45155.995 36357.95 53954.04
1-Mar-22 45307.522 36338.43 54276.62
1-Apr-22 45459.049 36321.75 54596.35
1-May-22 45610.576 36307.76 54913.39
1-Jun-22 45762.104 36296.32 55227.89
1-Jul-22 45913.631 36287.29 55539.97
1-Aug-22 46065.158 36280.56 55849.75
1-Sep-22 46216.685 36276.02 56157.35
1-Oct-22 46368.212 36273.56 56462.86
1-Nov-22 46519.739 36273.09 56766.38
1-Dec-22 46671.266 36274.53 57068.00
1-Jan-23 46822.793 36277.79 57367.80
1-Feb-23 46974.32 36282.79 57665.85
1-Mar-23 47125.847 36289.47 57962.22
1-Apr-23 47277.374 36297.76 58256.99
1-May-23 47428.901 36307.59 58550.21
1-Jun-23 47580.428 36318.91 58841.95
1-Jul-23 47731.955 36331.66 59132.25
1-Aug-23 47883.482 36345.79 59421.17
1-Sep-23 48035.009 36361.25 59708.77
1-Oct-23 48186.537 36378.00 59995.08
1-Nov-23 48338.064 36395.98 60280.15
1-Dec-23 48489.591 36415.17 60564.02
1-Jan-24 48641.118 36435.51 60846.73
1-Feb-24 48792.645 36456.98 61128.31
1-Mar-24 48944.172 36479.53 61408.81
1-Apr-24 49095.699 36503.14 61688.26
1-May-24 49247.226 36527.77 61966.69
1-Jun-24 49398.753 36553.38 62244.12
1-Jul-24 49550.28 36579.97 62520.59
1-Aug-24 49701.807 36607.48 62796.13
1-Sep-24 49853.334 36635.90 63070.77
1-Oct-24 50004.861 36665.21 63344.52
1-Nov-24 50156.388 36695.37 63617.41
1-Dec-24 50307.915 36726.36 63889.47

70000
60000
50000
40000
POINTS

30000
20000
10000
0
1-Nov-00

1-Nov-05

1-Nov-10

1-Nov-15

1-Nov-20
1-Jul-02
1-May-03

1-Jul-07
1-May-08

1-Jul-12
1-May-13

1-Jul-17
1-May-18

1-Jul-22
1-May-23
1-Jan-00

1-Sep-01

1-Mar-04
1-Jan-05

1-Sep-06

1-Mar-09
1-Jan-10

1-Sep-11

1-Mar-14
1-Jan-15

1-Sep-16

1-Mar-19
1-Jan-20

1-Sep-21

1-Mar-24

TIMELINE

Values Forecast Lower Confidence Bound Upper Confidence Bound

Fig 5.6 Predicted movement of SENSEX

 For predicting the future point movement of DOW JONES, the historical
monthly closing of the past 20 years is taken into consideration. An equal time interval
is taken. The data is exported to excel and then taking the data range of Timeline and
Values, forecast analysis was carried out. A confidence interval of 95% was
considered and the upper and lower confidence bounds were defined. The forecast
was done for the next five years and accordingly the chart and table were prepared
displaying the monthly closing prices

Table 5.2 Forecasted values of DJIA

Timeline Values Forecast Lower Confidence Upper Confidence
Bound bound
12/1/2019 28538.44 28538.43945 28538.44 28538.44
1/1/2020 28602.78896 27341.64 29863.94
2/1/2020 28667.13846 27150.73 30183.55
3/1/2020 28731.48796 26996.37 30466.61
4/1/2020 28795.83746 26866.09 30725.58
5/1/2020 28860.18697 26753.22 30967.15
6/1/2020 28924.53647 26653.67 31195.40
7/1/2020 28988.88597 26564.74 31413.04
8/1/2020 29053.23548 26484.52 31621.95
9/1/2020 29117.58498 26411.62 31823.55
10/1/2020 29181.93448 26344.97 32018.90
11/1/2020 29246.28398 26283.75 32208.82
12/1/2020 29310.63349 26227.28 32393.98
1/1/2021 29374.98299 26175.04 32574.92
2/1/2021 29439.33249 26126.58 32752.09
3/1/2021 29503.68199 26081.52 32925.85
4/1/2021 29568.0315 26039.54 33096.53
5/1/2021 29632.381 26000.37 33264.39
6/1/2021 29696.7305 25963.78 33429.68
7/1/2021 29761.08001 25929.57 33592.59
8/1/2021 29825.42951 25897.55 33753.31
9/1/2021 29889.77901 25867.57 33911.99
10/1/2021 29954.12851 25839.48 34068.77
11/1/2021 30018.47802 25813.17 34223.78
12/1/2021 30082.82752 25788.52 34377.14
1/1/2022 30147.17702 25765.42 34528.94
2/1/2022 30211.52652 25743.79 34679.27
3/1/2022 30275.87603 25723.53 34828.22
4/1/2022 30340.22553 25704.59 34975.86
5/1/2022 30404.57503 25686.88 35122.27
6/1/2022 30468.92454 25670.35 35267.50
7/1/2022 30533.27404 25654.92 35411.62
8/1/2022 30597.62354 25640.56 35554.68
9/1/2022 30661.97304 25627.21 35696.74
10/1/2022 30726.32255 25614.82 35837.82
11/1/2022 30790.67205 25603.35 35977.99
12/1/2022 30855.02155 25592.77 36117.28
1/1/2023 30919.37105 25583.02 36255.72
2/1/2023 30983.72056 25574.09 36393.36
3/1/2023 31048.07006 25565.92 36530.22
4/1/2023 31112.41956 25558.51 36666.33
5/1/2023 31176.76907 25551.81 36801.73
6/1/2023 31241.11857 25545.80 36936.44
7/1/2023 31305.46807 25540.45 37070.49
8/1/2023 31369.81757 25535.74 37203.90
9/1/2023 31434.16708 25531.65 37336.69
10/1/2023 31498.51658 25528.15 37468.88
11/1/2023 31562.86608 25525.23 37600.51
12/1/2023 31627.21559 25522.86 37731.57
1/1/2024 31691.56509 25521.03 37862.10
2/1/2024 31755.91459 25519.72 37992.11
3/1/2024 31820.26409 25518.91 38121.62
4/1/2024 31884.6136 25518.59 38250.63
5/1/2024 31948.9631 25518.75 38379.18
6/1/2024 32013.3126 25519.36 38507.27
7/1/2024 32077.6621 25520.42 38634.91
8/1/2024 32142.01161 25521.91 38762.12
9/1/2024 32206.36111 25523.81 38888.91
10/1/2024 32270.71061 25526.13 39015.29
11/1/2024 32335.06012 25528.84 39141.28
12/1/2024 32399.40962 25531.94 39266.88
1/1/2025 32463.75912 25535.41 39392.11
2/1/2025 32528.10862 25539.25 39516.97
3/1/2025 32592.45813 25543.44 39641.48
4/1/2025 32656.80763 25547.98 39765.64
5/1/2025 32721.15713 25552.85 39889.46
6/1/2025 32785.50663 25558.06 40012.96
7/1/2025 32849.85614 25563.58 40136.13
8/1/2025 32914.20564 25569.42 40259.00
9/1/2025 32978.55514 25575.56 40381.55
10/1/2025 33042.90465 25582.00 40503.81
11/1/2025 33107.25415 25588.72 40625.78
12/1/2025 33171.60365 25595.74 40747.47
1/1/2026 33235.95315 25603.02 40868.88
2/1/2026 33300.30266 25610.58 40990.02
3/1/2026 33364.65216 25618.41 41110.90
4/1/2026 33429.00166 25626.49 41231.51
5/1/2026 33493.35116 25634.83 41351.88
6/1/2026 33557.70067 25643.41 41471.99
7/1/2026 33622.05017 25652.23 41591.87
8/1/2026 33686.39967 25661.29 41711.51
9/1/2026 33750.74918 25670.58 41830.91
10/1/2026 33815.09868 25680.10 41950.10
11/1/2026 33879.44818 25689.84 42069.05
12/1/2026 33943.79768 25699.80 42187.80
1/1/2027 34008.14719 25709.97 42306.33
2/1/2027 34072.49669 25720.35 42424.65
3/1/2027 34136.84619 25730.93 42542.76
4/1/2027 34201.1957 25741.71 42660.68
5/1/2027 34265.5452 25752.69 42778.40
6/1/2027 34329.8947 25763.86 42895.93
7/1/2027 34394.2442 25775.22 43013.27
8/1/2027 34458.59371 25786.77 43130.42
9/1/2027 34522.94321 25798.49 43247.39
10/1/2027 34587.29271 25810.40 43364.19
11/1/2027 34651.64221 25822.48 43480.81
12/1/2027 34715.99172 25834.73 43597.26
1/1/2028 34780.34122 25847.14 43713.54
2/1/2028 34844.69072 25859.73 43829.65
3/1/2028 34909.04023 25872.47 43945.61
4/1/2028 34973.38973 25885.38 44061.40
5/1/2028 35037.73923 25898.44 44177.04
6/1/2028 35102.08873 25911.65 44292.53
7/1/2028 35166.43824 25925.02 44407.86
8/1/2028 35230.78774 25938.53 44523.05
9/1/2028 35295.13724 25952.19 44638.09
10/1/2028 35359.48674 25965.99 44752.98
11/1/2028 35423.83625 25979.93 44867.74
12/1/2028 35488.18575 25994.01 44982.36
1/1/2029 35552.53525 26008.23 45096.84
2/1/2029 35616.88476 26022.58 45211.19
3/1/2029 35681.23426 26037.06 45325.41
4/1/2029 35745.58376 26051.67 45439.50
5/1/2029 35809.93326 26066.40 45553.47
6/1/2029 35874.28277 26081.26 45667.30
7/1/2029 35938.63227 26096.25 45781.02
8/1/2029 36002.98177 26111.35 45894.61
9/1/2029 36067.33127 26126.57 46008.09
10/1/2029 36131.68078 26141.91 46121.45
11/1/2029 36196.03028 26157.37 46234.69
12/1/2029 36260.37978 26172.94 46347.82
12/31/2029 36322.6535 26188.11 46457.20
 POINTS

0
5000
10000
15000
20000
25000
30000
35000
40000
45000
50000

1/1/2000
1/1/2001
1/1/2002
1/1/2003
1/1/2004

Values
1/1/2005
1/1/2006
1/1/2007
1/1/2008
1/1/2009
1/1/2010
1/1/2011
Lower Confidence Bound(Values) 1/1/2012
1/1/2013
1/1/2014
1/1/2015
1/1/2016
TIMELINE

1/1/2017
1/1/2018
1/1/2019
Fig 5.6 Predicted movement of DJIA
Forecast(Values)

1/1/2020
1/1/2021
1/1/2022
1/1/2023
1/1/2024
Upper Confidence Bound(Values)

1/1/2025
1/1/2026
1/1/2027
1/1/2028
1/1/2029
12/31/2029
 CHAPTER 6

LIMITATIONS AND FUTURE SCOPE

6.1 Limitations

The method of regression analysis is widely used by many to predict the future
movements. It can be both used in Excel as well as used in many programming
languages like Python and Java. Although the prediction is very accurate but still this
method has its own limitations as compared to the other models.

The limitations of using the method of regression analysis in are:

• It is assumed that the cause and effect relationship between the

variables remains unchanged and this assumption may not
always hold good and hence estimation of the values of a
variable made on the basis of the regression equation may lead
to erroneous and misleading results.

• The functional relationship that is established between any two

or more variables on the basis of some limited data may not hold
good if more and more data are taken into consideration

• It involves very lengthy and complicated procedure of

calculations and analysis.

• It cannot be used in case of qualitative phenomenon viz.

honesty, crime etc.

• It is sensitive to outliers

6.2 Future scope

In this project regression analysis has been used to predict the market
movement but it can also be used for various other types of tasks.

The future scope of this method is:

• Predicting and forecasting the demand of a product

• Can be used in a wide variety of business applications like

measuring the impact on a corporation’s profits of an increase in
profits
 CHAPTER 7

RECOMMENDATIONS

7.1 Project recommendations

Some of the recommendations that can be applied are:

• Using various computer programming languages like Python

and R

• Implementing machine learning algorithms like Artificial

Neural Networks (ANN) in these programming languages so as
to get a more accurate forecast result
 CHAPTER 8

CONCLUSION

The conclusion that can be drawn from this project is that stock market crashes occur
due to a variety of factors whether it is due to panic or whether it is due to economic
distress but if quantitative tools are properly used to predict the markets, the any
individual can predict whether the market is going to rise or fall and accordingly make
appropriate buy or sell decisions
 CHAPTER 9

REFERENCES

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BRIC-An Empirical Study. Asian Economic and Financial Review, 4 (6), 715-731.
Goldsmith, R. W. (1971). Capital Markets and Economic Development. National
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 CHAPTER 10

ABSTRACT

Stock market is considered the primary indicator of a country's economic strength.

Prices of stock market are volatile in nature and are affected by various factors like
inflation, economic growth, individual risk etc. Thus, the prices of a share market are
mainly driven by demand and supply. High demanding stocks will see an increase in
price whereas low demanding stocks will see a decrease in price as they will be sold
heavily. These significant drop in price if occurring rapidly can lead to a stock market
crash. occur due to some major catastrophic events or an ongoing economic crisis or due
to a collapse of a speculative bubble which has been there for long enough to cause the
damage. A crash is generally considered when the majority of stocks decline rapidly and
for a period of time. In this report, we study and analyze the reasons behind the crashes
and what were the consequences. Among the many quantitative tools, we use regression
analysis which can be used to predict the market movement by analyzing the historical
data so that investors can anticipate the market and can make appropriate buy or sell
decisions.