analysis of stock market fluctuations

BUSINESS RESEARCH METHODS

RESARCH REPORT

ON

ANALYSIS OF STOCK MARKET

FLUCTUATIONS

SUBMITTED TO: SUBMITTED BY: DR. VIBHAVA SRIVASTAVA ADITYA KAPOOR (2012020)

MARKETING AREA AMIT GUPTA (2012037)

GROUP - 2

SECTION - A

PGDM- 2012-14

ANALYSIS OF STOCK MARKET FLUCTUATIONS

2 | GROUP – 2 SECTION – A P G D M - 2 0 1 2 - 1 4

SUMMARY:

The report will tell the behavior of stock prices within a specific period of time and what

factors influence the stock prices. The stock prices according to our report particularly are

influenced by increase/decrease in internal factors such as sales and profitability and by

external factors such as its relationship between stock market behavior and cycle period of

economy (boom or recession). The weight age of each of these factors is industry specific.

PROBLEM STATEMENT:

Sometimes we observe that whenever any monetary or fiscal decision or when any company

declares its result like how much they earn profit in the particular financial year or when they

announce any expansionary project, capital market got affected. So, we want to find out

whether the fluctuations in stock markets are random or follow a cause and effect relationship

with all these decisions. Hence, we have derived the hypothesis, and they are:

H0: That all the variables (sales, profitability and economic indicators) will affect the

stock return, and stock fluctuations behavior can be determined by these variables.

H1: Stock market behavior will be determined by the technical analysis.

BENEFITS OF THE STUDY:

Broadly we have classified the benefits research into various sub groups:

As an investor:

1. An investor will be able to predict returns and take decisions according.

2. Investor can earn higher returns.

As a Student: Student can learn about various research methods that are used to

determine the stock market.

RESEARCH DESIGN:

We have followed the exploratory research approach and our research is typically based on

the secondary data plus on a small focused group survey by targeting those persons who

invests in the market frequently, hence we have taken a sample size of 20 persons. Through

the survey we are to predict the investor behavior that how they invests in the market and

what are the factors which they see In this research we are analyzing the stock market

movement by doing fundamental research which includes the variables like beta value,

profitability and sales of the company and economic indicators like GDP, inflation as well.

With all these variables we have tried to predict the dependency of the variables among each

other. As exploratory research allows us to manipulate the discoveries due to less stringent

methodological restrictions, hence we have used the data to do the research on our hypothesis

that we have made. We are focusing on the research objective that if any normal investor

invests in the market by analyzing all these factors then is (s)he will be able to earn a good

amount on the stock market provided that all the factors that we have taken are dependent or

not. So if all the factors are dependent then we can infer that our objective is workable and if

not then we have to simply shift towards the technical analysis (observing the trend that how

much shares are being purchased and sold or how much money is invested on daily basis) of

the market which is beyond our research scope because it requires very typical and heavy

calculations on the daily basis.



QUESTIONNAIRE ANALYSIS:

A focus group questionnaire was filled by 20 respondents i.e. by those who invest frequently

in stock market and also look at some factors while investing in stock. Following were the

questions asked to them:

1. How frequently do you invest in stock market in a year?

a. Daily

b. Weekly

c. Fortnightly

d. Monthly

e. Quarterly

f. Yearly

2. How much do you invest in a year (in ₹)?

a. 0-25, 000

b. 25, 000-50, 000

c. 50,000 -75, 000

d. 75, 000 & above

3. What factors you observe while investing in a company stock?

a. Fundamentals

i. Sales or Quarterly Results

ii. Profitability

iii. P/E Ratio

iv. Company type (Blue Chip or White chip)

v. Business Trend

vi. News

1. Economic News

2. Stock Specific News

b. Technical

Following results were obtained:

1. How frequently do you invest in stock market in a year?

0

10 5 8

3 4

0 0



2. How much do you invest in a year (in ₹)?

3. What factors you observe while investing in a company stock?

DATA ANALYSIS:

1. STATE BANK OF INDIA:

STATE BANK OF INDIA

RELATION BETWEEN STOCK RETURN AND CORRELATION REGRESSION SIGNIFICANCE F

SALES 0.766725515 0.587868015 0.130413348

PROFITABILITY 0.661256299 0.437259894 0.224253153

ECONOMIC INDICATORS 0.865156419 0.74849563 0.05822293

ALL THREE VARIABLES 0.916442587 0.839867014 0.49556236

After all the calculations, we observe that there is high correlation and good dependency

between stock return and economic indicators and this argument is also closely supported

by the significance F value(1%).

Considering the relation between sales and return correlation is high and dependency

is moderate but significance value of F shows the amount of errors the data set

possess and same is the case with profitability and return. In order to solve or rectify

rather this problem we clubbed all the variables.

Rs0-25000 5% Rs25000-50000

10%

Rs50000-75000 45%

Rs75000 ABOVE

40%

Frenquency

14

8

12 11

5

18

10

0

5

10

15

20

Series1



Considering the relation between the stock return and economic indicators and we

found that the significance level is somewhat supporting our result which helps in

analysing the behaviour of stock fluctuations. To support this argument graph 1.1

depicts the same behaviour i.e. any monetary or fiscal measures taken by the govt. the

stock markets move accordingly. Still the data have very small percentage of errors.

Graph 1.1: RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURNS

So, to remove this error we clubbed all the variables with each other.

After clubbing all the dependent variables (sales, profitability and economic

indicators) and find the correlation between clubbed variables and stock return we

find the problem of multi co-linearity even though there is a high correlation and

dependency among themselves. Graph 1.2 shows the same i.e. because of problem of

multi co-linearity the behaviour of both the lines is somewhat different. So, it is hard

to determine the stock market behaviour with these variables.

GRAPH 1.2: RELATION BETWEEN RETURN AND SALES, PROFITABILITY AND ECO. INDICATORS

2012 2011 2010 2009 2008

economic indicators 0.0334375 0.042875 0.04325 0.02575 0.040275

stock return -0.39893 0.748289 0.252093 -0.41373 0.485794

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURNS

2012 2011 2010 2009 2008

RETURN -0.39893 0.748289 0.252093 -0.41373 0.485794

SALES, PROFITABLITY & ECO.INDICATOR

0.696229868 -0.116466523 0.07643367 0.457001297 0.581982196

-0.5

0

0.5

1

RELATION BETWEEN RETURN AND SALES, PROFITABILITY AND ECO. INDICATORS



So, for the banking sector an investor can somewhat rely on the economic indicator.

And other than that an investor can also go for the other factors for the stock

fluctuations like price to earnings ratio or otherwise investor has to go for the

technical analysis.

2. MARUTI SUZUKI INDIA LIMITED:

MARUTI SUZUKI


SALES 0.463136819 0.214495713 0.432133082

PROFITABILITY 0.841827236 0.708673096 0.073696915



Initially if an investor got influenced with the sales and profitability results of the

company then it might not get the accurate picture about the stock movement because

for sales correlation and dependency with the stock return are low and high and weak

and moderate respectively. But if we analyse the significance F value; it shows the

high percentage errors in the sales data and very low error in the profitability data but

logically it should be the same because both sales and profitability are interrelated

with each other. So, it is not showing the clear picture.

Considering the economic variable with stock return; the correlation is very strong

and dependency between them is also very high and significance value of F test also

GRAPH 2.1: RELATION BETWEEN ECONOMIC INDICATOR AND STOCK RETURN

supports our argument as there is almost no error in the data set. But after observing the

graph it is clear that economic indicators like GDP and inflation that we had considered

are not enough to substantiate the stock fluctuations (refer graph 2.1) there is a possibility

of other economic factors like any measures taken by the govt. for the stock specific or

sector (automobile) specific might be there which is influencing the stock prices in the

market. For that we have combined all the variables to find the clear picture.

After clubbing all the variables, there is a strong relation and high dependency among

others and the same is supported by the F value. So, our assumption in above point is

2012 2011 2010 2009 2008

ECONOMIC INDICATOR 0.0334375 0.042875 0.04325 0.02575 0.040275

STOCK RETURN 0.62663 -0.34683 -0.0859 1.847905 -0.47077

-1

-0.5

0

0.5

1

1.5

2

RELATION BETWEEN ECONOMIC INDICATOR AND STOCK RETURN



GRAPH 2.2: RELATION BETWEEN STOCK RETURN AND SALES, ECONOMIC INDICATORS AND

PROFITABILITY

almost founds to be true and the same is being supported by the graph 2.2 that all the

variables and the other variables results in the fluctuations of this stock and behaviour

can be analysed about the market fluctuations can be determined.

So, for an investor to earn good profit through this stock they must look towards the

economic indicators with other indicators like P/E ratio and beta values of the stock as

well.

3. DR. REDDY’s:

DR. REDDY's


SALES 0.472567434 0.22331998 0.421520897

PROFITABILITY 0.536678712 0.28802404 0.35106906



The relation between sales and return is moderate and dependency between them is

low and F value shows the good amount of errors in the data set or in other words

very noisy data, same is the case with profitability. So it is hard to depict the true

behaviour of the stock with these two factors. For this to overcome we have to

increase the data set range from five years to large number in order to clear the picture

or we to choose other factor.

Relation between economic indicators and return is strong with moderate dependency

and significance F value shows a little amount of noisy data which can be rectified if

2012 2011 2010 2009 2008

SALES, RETURN ANDECONOMIC INDICATORS

-0.258914554 0.020945 0.15734397 -0.233295 0.2033916

STOCK RETURN 0.62663 -0.34683 -0.0859 1.847905 -0.47077

-1

-0.5

0

0.5

1

1.5

2

RELATION BETWEEN STOCK RETURN AND SALES, ECONOMIC INDICATORS AND

PROFITABILITY



GRAPH 3.1: RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN

increase our data set range. But after observing the graph 3.1 the result is something

else because economic indicators have no impact on stock returns which means that

there is some other factor which is influencing the stock behaviour. It might be the

price to earnings ratio or beta value of the stock or something else. The measures

taken by the govt. are not affecting the stock market; either there is a possibility that

the measures are not sector and stock specific. For this to determine we clubbed all

the variables.

After clubbing we found the high dependency and strong correlation among all the

variables but the data set is very noisy as there is a problem of multi co-linearity. So,

GRAPH 3.2: RELATION BETWEEN STOCK RETURN AND SALES, PROFITABILITY AND ECO.

INDICATORS

2012 2011 2010 2009 2008

STOCK RETURN 0.1724 -0.052 0.3313 1.4375 -0.3554

ECONOMIC INDICATORS 0.0334375 0.042875 0.04325 0.02575 0.040275

-0.6

-0.4

-0.2

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN

2012 2011 2010 2009 2008

STOCK RETURN 0.1724 -0.052 0.3313 1.4375 -0.3554

ECO. INDICATOR, SALES &PROFITABILITY

0.12690457 0.143804 0.576519 0.25502 -0.584922

-1

-0.5

0

0.5

1

1.5

2

RELATION BETWEEN STOCK RETURN AND SALES, PROFITABILITY AND ECO. INDICATORS



If we increase the data set range then that problem can be rectified. From the graph

3.2 it is clear that all the variables are highly dependent on the stock return and they

are moving in a same way. And also there is possibility that stock is getting

influenced by some other factors because in the range of five years of data; data set is

very noisy so there might be a possibility that some other factors or indicators are

affecting the stock. So, investors have to closely observe all the factors in order to

gain profit from this stock.

4. LARSEN AND TUOBRO:

L & T

RELATION BETWEENSTOCK RETURN AND CORRELATION REGRESSION SIGNIFICANCE F

SALES 0.014241594 0.000202823 0.981867652

PROFITABILITY 0.299605326 0.089763351 0.624317065



As this is the stock of capital goods, so sales and profitability will not affect the stock

return anyhow the capital goods which are producing by the industry are always in

demand. Their demand varies only when govt. takes any monetary or fiscal measures

for the further expansion or to boost the industrial sector of the company. The same

has been reflected by the data set that weak correlation and very low dependency of

the sales and profitability with the stock return. And the same has been supported by

the significance F value which shows the huge amount of percentage errors in the

data.

On finding the relation between the economic indicators and return we find that

relation is good and dependency is moderate which means that there is a relation

between them which is affecting the stock fluctuation in the market but graph 4.1 says

.GRAPH 4.1: RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN

something else. It says that economic indicators alone are not affecting the stock there

is a measure taken by the govt. for this sector which is affecting the stock; which we

tried to find by clubbing all the variables.

2012 2011 2010 2009 2008

STOCK RETURN 0.630653 -0.48989 0.181623 1.057856 -0.61843

ECONOMIC INDICATORS 0.0334375 0.042875 0.04325 0.02575 0.040275

-1

-0.5

0

0.5

1

1.5

RELATION BETWEEN ECONOMIC INDICATORS AND STOCK RETURN



After clubbing we find that correlation is very strong and dependency of all the

variables are very high, and the data set are having somewhat low noise or problem of

multi co-linearity is there which can be rectified by increasing the data set range.

GRAPH 4.2: RELATION BETWEEN STOCK RETURN & ECO. INDICATOR, SALES AND PROFITABILITY

By closely observing the graph 4.2 we find that our argument is true. The stock is behaving in

the same way as the variables are behaving. Hence for investors to invest in the capital goods

firms they must see those factors which are affected directly by the measures taken by the

govt.

KEY FINDINGS:

From the above research we can conclude that:

Sales and profitability though they are positively related to the return to stock but have

high level of significance of 20-50%, which means high number of errors. This cannot be

validated, so they are not considered. To remove errors this we can take longer range of

data.

The economic indicators- GDP and Inflation measure the overall growth and money

supply of an economy. These show positive relation with stock returns and have only 1%

level of significance.

After clubbing all the data of sales, profitability and economic indicators we conclude that

although these are highly related with stock returns but have larger significance value i.e.

from 6%-50%. So these all data cannot be validated.

There are some other factors such return of stock with relation to market return and P/E

ratio etc. that also affect the stock price.

RECOMMENDATIONS:

Our study suggests following recommendations:

As an investor in stocks one should not go by the figures of increase or decrease in sales

and profitability because they have a chance that they will not affect the return of stock.

2012 2011 2010 2009 2008

STOCK RETURN 0.630653 -0.48989 0.181623 1.057856 -0.61843

ECO. INDICATORS, SALES ANDPROFITABILITY

0.2146662 -0.006575 0.322234 0.716977 0.6928262

-0.8-0.6-0.4-0.2

00.20.40.60.8

11.2

RELATION BETWEEN STOCK RETURN & ECO. INDICATOR, SALES AND PROFITABILITY



While investing one should always look for economic indicators such as GDP and

Inflation because these figures directly affect the stock returns. An increase in these

factors will also increase the stock returns. So, as an investor one should see that whether

the GDP growing or not and inflation is high/low.

REFERENCES:

For all the figures in the tables refer spread sheet.

Bloomberg terminal for beta values, stock returns

Other online resources for the price to earnings ratio, sales and profitability like

o www.moneycontrol.com,

o www.bseindia.com

o www.money.rediff.com

o www.tradingeconomy.com for economic indicators like GDP, inflation.

E-resources like: prowess and Capitaline.

http://www.moneycontrol.com/

http://www.bseindia.com/

http://www.money.rediff.com/

http://www.tradingeconomy.com/

analysis of stock market fluctuations

Economy & Finance