Relationship Between Stock Index Finance Essay

This survey seeks to look into the relationship between stock index returns and rate of involvement i.e. the bank rate. Consequently, this chapter is concerned with the description of the information set that will be used followed by the analysis program, i.e. the trials ( unit root trial, co-integration testaˆ¦ ) that will be carried out during the analysis. Furthermore, the theoretical account to be used for proving the information is besides explained, which will come up with the solution of the hypothesis.

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Based on the above aims, unit root trial and co-integration trial will be employed. Following these trials, the simple arrested development, whereby the additive relationship between the dependant and independent variables is obtained will be run. All statistical trials were carried out at 0.05 degree of significance.

In the above theoretical account, the dependant variable is the stock index returns of SEMDEX and DEMEX while the rate of involvement is the independent variable.

The above theoretical account has been extracted from “ Journal Article- The relationship between stock market capitalisation rate and involvement rate: Evidence from Jordan ” – Husni Ali and Al. However, the theoretical account specified in this article included 1 more variable- authorities development stock rate.

Furthermore, GARCH theoretical account will be employed through E-views 4.1 to gauge the stock market volatility based on the Model 2 that Zafar and Al. used which include involvement rate alterations in both the mean and the discrepancy and the equation includes the explanatory variables which is expressed as ( see 4.3.3 )

4.3 Diagnostic trial

This is used to see whether any premises of the informations are disobeyed. As, such the Unit Root trial and the Co-integration trial are used. If there is Co-integration, there exists Granger Causality in at least one way. Hence, if there is causality, the way utilizing Granger Causality will be tested.

4.3.1 Unit Root Test

The Unit Root trial is usually used as an initial phase to see whether the stock monetary values ( Return on Index ) and the rate of Interest are in stationery procedure. There are fundamentally legion methods in Unit Root tests including ADF, Pantula tests, Phillips Peron trials, kwaitowski-Phillips-Schmidt-shin, etc. , but this survey will merely use the Augmented Dickey Fuller ( ADF ) trial to look into whether each information series are integrated and has a unit root because ADF is said to be compatible with E-views 4.1 and as such easy and simple to understand.

4.3.2 Co-integration Trial

As said above, if there exists a unit root, so the Co-integration trial is preceded. It is of import to find the nature and presence of the equilibrium econometric relationship. In other words, if it exists a long tally equilibrium relationship between the stock monetary values and rate of involvement.

4.3.3 GARCH Model

“ Many surveies have used ARCH theoretical account introduced by Engle ( 1982 ) and GARCH theoretical account which is a generalised signifier of ARCH introduced by Bollerslev ( 1986 ) and used by ( N’dri Konan Leon,2008 ) to pattern volatility in stock markets ” – ( Quoted Zafar and al. Research- Interest Rate Volatility and Stock Return and Volatility ) . The GARCH theoretical account is usually used to gauge stock market volatility.

Yt = I?0 + I?1yt-1 + I?2rt+ ??t-1 aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦..Model ( I )

I?2 = I‰ + I±??2t -1 + I?I?2t-1 + I»rtaˆ¦aˆ¦aˆ¦aˆ¦aˆ¦aˆ¦..Model ( II )

Where, Yt = Return on Index at clip T ( Dependent Variable )

T = clip at a specific period

R = bank rate as a rate of Interest at clip T ( Independent Variable ) and

I?2 = discrepancy, ??2t-1 = invention and Yt-1 = lagged returns an I?0, I?1, I‰ , I± , I? = invariables

4.4 Justification of Variables

As mentioned above, the selected variables are the stock monetary values where the stock monetary value index will be used and the rates of Interest. The theoretical account besides includes the mistake or perturbation term which captures all other factors that the independent variable can non to find the dependant variable.

4.4.1 Bank Rate ( as a step of Rate of Interest )

An involvement rate is the cost of borrowing money. Many research workers have used 90- Treasury Bills as a step of involvement rates in their survey since it is considered as the best placeholder of involvement rates motions. However, this survey will use ‘bank rate ‘ as a step of the rate of involvements. The bank rate is usually the involvement rate at which a state ‘s cardinal bank lends money to local Bankss. The bank rate is really the independent variable in the above theoretical account.

To sum up, the specified theoretical account should be as follows, i.e. , Stock Market Index return should a map of the rate of involvement, i.e. the bank rate including the error term:

Return on Index = degree Fahrenheit ( bank rate ) + aˆ¦aˆ¦aˆ¦aˆ¦

4.5 Data Collection and Source

The information to be used in this empirical analysis is chiefly secondary informations collected from the period 31st January 2006 to August 2012. This survey employs the return on Index as the dependant variable and the bank rate as the independent variable. Monthly stock indices informations for Stock Exchange of Mauritius ( SEM ) and the Development and Enterprise Market ( DEM ) are gathered from the official web site of SEM and monthly bank rate ( as a step of involvement rates ) is collected from the official web site of Bank of Mauritius Monthly index returns for SEMDEX and DEMEX will be calculated as:

Rt = Ln ( PIt / PIt-1 )

Where, Rt = stock market return at period T ; PIt = monetary value index at period T ; PIt-1 = monetary value index at period t-1 ; ln = natural log

The ground for the pick of these variables mentioned supra is because these variables will assist investors in doing good investing determinations due to their great consequence on investing returns. Besides, the ground to take bank rate as a step of rate of involvement is because it is obtained easy on the BOM web site and normally rescuers invest in their nest eggs for higher involvement for certainty when investing do non look to be profitable in stock market.

4.5.1 Descriptive Statisticss

The tabular array below shows the mean, standard divergence, lopsidedness and kurtosis for the sample period January 2006 to August 2012. SEMDEX: the stock returns series with a standard divergence of – shows a – lopsidedness which means that information is skewed towards – . Besides, – kurtosis shows that the distribution is – . As for DEMEX, the information is skewed towards the – since it is – skewed.

Table 1: Descriptive statistics for sample period of January 2006 to August 2012

Variables

Mean

S.D

Lopsidedness

Kurtosis

Yt: SEMDEX

DEMEX

rt

Yt: Stock Index returns

Rt: involvement rate

4.6 Decision

To reason, given the necessary information, it would be possible to find whether there is a positive or negative relationship between the Stock Index return and the rate of involvement following the processs stated supra. As such, this will assist most investors to do good determinations before puting in peculiar security as they are profit maximizes.

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