Stock market

Abstract

Stock market and money market are two most preferred option for an individual or institution to invest their money. While the stock market gives higher return than the bond market, it also has inherently higher risk. The risk for investing in stock market could be because of the specific stocks or could be due to macroeconomicfactors. The former could be eliminated through diversific. n, while the latter, the idiosyncratic risk cannot be diversified while investing in anr arket. The purpose of this project is to understand the effect of major macroeconomic factors like real GDP growth rate, real interest rate and Inflation on the stock market return. This analysis will help the investors in diversifying their investment risks beyond the specific stock risks by investing in a market which could yield a better stock market return by assessing its macroeconomic data. For the analysis, we have considered 15 countries from across the globw nd considered the stock market return from the period of 1994 to 2019. We have also taken the real GDP growth rate data, real interest rate and inflation for the same period from Bloomberg and world bank databases. We have analysed the correlation of the stock market return with GDP growth, real interest rate and inflation individually for the stated period. We found some contradictory results from some of the previous literatures like stock market return should be lower as real interest rate increases as this provides investors a new avenue to invest their fund. However, we got the reverse trend in case of many countries. Similar observations were made in case of GDP growth rate as well. To understand this contradictory result in depth, we further analysed the data for pre-crisis and post-crisis period (2008 Sub-prime mortgage crisis). We observed that before crisis, the market was behaving as expected, however after the crisis hit, investors behaviour changed significantly, and the market did not work exactly as it should have. This is explainable because when so many investors lost their fortune in the crisis, investors were tending to be more cautious, and hence even with increasing GDP or decreasing real interest rates after the crisis, they were preferring bond market over stock market. This means that when stock market should rise after the economy was back on track, its correlation was . rom what it should be. This resulted in some contradictory results when we had combined both pre-crisis and post-crisis period. Although the stock market correlation was altered due to crisis, as the time passes, the market tends to return at its equilibrium level, and the correlation with the economic variables will again be restored. This project study, however, provides a very important insights in terms of how the market could behave in case of a crisis. The risk averseness of the investors increases post-crisis, and they shift towards a safer option of investment during such period. Finally, a further analysis is required to understand all the anomalies in detail one by one.