Casual Relationship between the Macroeconomic Variables and Stock Prices

Stock markets generally reflect the economic conditions of an economy, Alfaro, Chanda, Kalemli-Ozcan, & Sayek (2004). If an economy is growing then output will be increasing and most firms should be experiencing increased profitability. This higher profit makes the company shares more attractive – because they can give bigger dividends to shareholders. If the economy is forecast to enter into a recession, then stock markets will generally fall. This is because a recession means lower profits, less dividends and even the prospect of firms going bankrupt, which would be bad news for shareholders.

A macroeconomic item (or factor) may be generally categorized as anything that influences the direction of a particular large-scale market (Investopedia, n.d.). For this analysis, the macroeco-nomic factor shall be interest rate (i.e. discount rate). The following sections that scrutinize the implications of changes to interest rates to the Company’s Present Value* (PV), based on its Free Cash Flows* (FCF); discuss the impact of an issue within the overall stock market on the Com-pany’s stock valuation numbers, other financial variables, or its overall portfolio management; and analyze and discuss the impact of an external factor to the Company.

Since the great depression, the global economy has been facing a number of ups and downs. With the markets being built rapidly and crashing down in the other instant, elements that actually make up the skeleton of the international economy seems to have correlated variables. These variables seems to have been correlated with each other in numerous combinations and their correlation is what makes the market fluctuate. The volatility of the global market becomes more apparent in times of recession when the correlation between variables like stocks, bonds, US dollar, Euro, gold and oil becomes more apparent. Therefore, it is of paramount importance that these correlated variables should be studied with a very keen eye. Since the link between currencies, commodities, stocks an bonds runs very deep, change in any one of them seems to have a profound impact on the rest hence changing the face of the market.

The stock market as measured by the Dow 30 industrials bottomed in March at which time the Dollar index negatively correlated by peaking in price. In all the retracements and minor corrections that occurred, since then, in the Dow the dollar also experienced a similar but opposite reaction.

The 2008 global financial crisis (GFC) (Shah 2009, p. 25) has caused the share prices of BHP, CBA and TLS to drop rapidly from 2008 to 2009, apparent from the 10-year historical data of the three companies’ share price (Appendix 1). This shows that the all three companies’ share prices are influenced by the GFC, which means the GFC has the similar result in the calculation of three stocks’ expected return. Hence, the data from that period are included in the data choice.

The objective of this study is to investigate the causality relationship between the Health Care industry and nine other industries. Previous literature shows that the volatility of stock prices is informative; Granger causality is applied in this research by the use of a leveraged bootstrap test developed by Hacker and Hatemi-J (2006) to monitor the behavior of the volatility. The results shows evidence that support the volatility of the Health Care industry has an impact on the volatility of the Industrial, Consumer Staples and Financial industries. Also, the Health Care industry market was affected by five out of nine other industries, Energy, Materials, Consumer Staples, Information Technology and Utilities.

Majority of fundamental traders influence the market most. That is, technical traders have little or no effect on stock prices.

Efficient capital market “It was generally believed that securities markets were extremely efficient in reflecting information about the stock market as a whole” (Fama 1970). To extent that when there is new information about stock rise, the news was dispersed immediately and it affects the security 's price at that time.

of economy. However, the existing literature is silent on the stock price dynamics and agency costs

Despite numerous periods of global financial excesses, and subsequent corrections, over the past 30 years, the returns on equities and bonds in the US and Europe have been considerably above their long-term averages. The outperformance has been most pronounced in long-dated government bonds. The average annual real return on these instruments between 1985 and 2014 was +5.0% in the US and +5.9% in Europe, compared to long-run returns of +1.7% and +1.6%, respectively. Meanwhile, the outperformance of equities between 1985 and 2014 was more modest. The average annual real return on US equities was +7.9%, compared to a long-run average of +6.5%, while these respective measures in Europe were +7.9% and +4.9%. Two major related factors can predominantly explain this golden period for both bonds and equities, namely the taming of inflation and the subsequent decline in interest rates to historic lows. Both inflation and interest rates are important inputs into valuation models for long duration assets, thereby implying that their respective influences on returns over the past 30 years have, therefore, been largely felt through changing valuations. Equity returns are, however, explained by other factors, including economic and corporate fundamentals, of varying complexity. Positive demographics, technological innovation, and global supply chains have also helped to contain costs, while the emergence of new markets, notably China,

Despite numerous periods of global financial excesses, and subsequent corrections, over the past 30 years, the returns on equities and bonds in the US and Europe have been considerably above their long-term (100 year) averages. The outperformance has been most pronounced in long-dated government bonds. The average annual real return on these instruments between 1985 and 2014 was +5.0% in the US and +5.9% in Europe, compared to long-run returns of +1.7% and +1.6%, respectively. Meanwhile, the outperformance of equities between 1985 and 2014 was more modest. The average annual real return on US equities was +7.9%, compared to a long-run average of +6.5%, while these respective measures in Europe were +7.9% and +4.9%. Two major related factors can predominantly explain this golden period for both bonds and equities, namely the taming of inflation and the subsequent decline in interest rates to historic lows. Both inflation and interest rates are important inputs into valuation models for long duration assets, thereby implying that their respective influences on returns over the past 30 years have, therefore, been largely felt through changing valuations. Other factors, of varying complexity, can help to explain impressive equity returns, including economic and corporate fundamentals. Positive demographics, technological innovation, and global supply chains have also helped to contain costs, while the emergence of new markets,

considered to be linked to stock prices. Dilon and Owers (1997) argues that, if the

First time this phenomenon was presented by the economists Rajnish Mehra and Edward Prescott in 1985. They discovered that the return from US equity investments in comparison to the return from a risk free government securities had been much far above during the twentieth century to be interpreted by the traditional economic theories (Siegel and Thaler, 1997).

The research problem is: It’s about the capital market. In capital market we can see that the price of the shares fluctuates. In all capital market price goes up and down but in our country it is highly fluctuate.

6. It is widely believed that changes in certain macroeconomic variables may directly affect performance of an equity portfolio. As the chief investment officer of a hedge fund employing a global macro-oriented investment strategy, you often consider how various macroeconomic events might impact your security selection decisions and portfolio performance. Briefly explain how each of the following economic factors would affect portfolio risk and return: (a) industrial production, (b) inflation, (c) risk premia, (d) term structure, (e) aggregate consumption, and (f) oil price.