Multiple Regression Model Analysis MBA 643-WD01

Introduction

Today’s stock market offers as many opportunities for investors to raise money as
jeopardies to lose it because market depends on different factors, such as overall
observed country’s performance, foreign countries’ performance, and unexpected
events. One of the most important stock market indexes is Standard & Poor’s 500 (S&P
500) as it comprises the 500 largest American companies across various industries and
sectors. Many people put their money into the market to get return on investment.
Investors ask themselves questions like how to make money on the stock market and is
there a way to predict in some degree how the stock market will behave? There are lots
and lots of variables involved in how the stock market behaves at a specific time. The
stock market is in a way an information agency. Based on new information, whether
good or bad regarding almost everything from political issues to interest rates and
inflation, the stock market can go up or down. The market is anticipating economic
occurrences pro-actively, ignoring already occurred events that were predicted before.
This way it is very hard to predict how it is going to move in the future. As S&P 500 is
considered to be the most reliable benchmark for the overall U.S. stock market, we
decided to study what factor has the most impact on it. We created two regression
models and included the economic indicators, such as Consumer Price Index, Producer
Price Index, House Price index, Interest Rate, Unemployment Rate,
and Gross Domestic Product of some countries.
First Regression Model Specifications and DataHow accurately can we predict the stock market
behavior? People working in the finance industry have been trying to estimate or predict
the behavior of stock market for a long time, or maybe some of them already have a
very long and complex model of predicting the behavior of a stock market based on
many factors and variables. We decided to use the US economic indicators and the
other countries’ GDP. With this research we are hoping to find a statistically significant
model that would describe what affects the stock market. We used the average annual
data from 1980 to 2011 to track the influence on the US market. Our data is a time-
series data. It is very interesting since within these 31 years there were a lot of
changes in the countries’ economies, financial regulations and policies.
At the very beginning, we assumed that the following factors may have influence on
stock market: S&P500 (Percentage Change) = β0 + β1 * (Annual CPI) + β2 * (Annual
Average PPI) + β3 * (Annual Average House Price Index) + β4 * (Annual Average
Interest Rate) + β5 * (Percentage Change of Annual Average GDP of US) + β6 *
(Percentage Change of Annual Average GDP of Spain) + β7 * (Percentage Change of
Annual Average GDP of Germany)
β1: Consumer Price Index reflects the state of inflation in the country’s economy. That
indicator is very important in the assessment of the stock market performance. If
inflation grows, the interest rate rises and this prevents the companies to borrow
money for further development of their businesses. This entire situation may hurt the
stock prices of the companies and that’s why we wanted to see how big the impact is.
We assume that this variable is going affect the dependent variable a lot. β2: Producer
Price Index indicates early state of inflation. Therefore, if investors know that the PPI
heralds a strong economy with no increase in an interest rate, then they feel confident
to invest in the businesses what means increased positive activity in the market. We
assume that this variable is going to have some impact on the dependent variable
however; it is not going to be crucial.
β3: House Price Index is an analytical tool for estimating changes in the rates of
mortgages. If mortgage rates are high, then housing market is weak because demand
for houses drops due to expensive loans, therefore HPI drops. In 2008 mortgage
default affected stock market very severely because before that period house prices
went down because people couldn’t pay their mortgage payments and banks collapsed.
Decrease in house prices is one of the possible contributors to recession because the
home owners lose their equity in their houses. Considering such recession scenario, the
stock market always becomes bearish. Additionally, house market is considered more
stable investment than stock market. When stock market drops, people are willing in
the houses and HPI goes up. We assume that HPI and stock market shouldn’t move in
the same direction thereby we don’t take into consideration the complex scenario of
2008.
β4: 10-Year Treasury Constant Maturity Rate impacts on the number of issued bond and
is used as risk free rate to calculate the excess return on the investment. It also has an
influence on the stock market.
β5: Gross Domestic Product of the US is important for business profit and this can drive
the stock prices up. Investing in the stock market seems reasonable when the economy
is doing well. If the economy is growing fast then the stock market should be affected
positively, the investors are more optimistic about the future and they put more money
into market more. This variable is crucial for the dependent one.
β6: Gross Domestic Product of Spain. Since Europe is currently in a recession, we
wanted to include the GDP of Spain, as one of the weakest economies in Europe now,
to check if there is any relationship between Spain’s economy and the US stock market
performance. Very small percentage of US investments goes to Spain. Compared to
Germany, which is the 5th country the USA invests into, Spain is the 31st country on
the list. There should not be any correlation between these two variables, so we
included Spain’s GDP into our regression to check our hypothesis.
β7: Gross Domestic Product of Germany is an indicator of Germany is the 5th largest
economy in the world and is the largest European trade and investment partner of the
US. Germany is the largest economy in Europe and almost 1/5 of GDP of the European
Union is that of Germany alone. We assume that this variable has to have an impact on
the US stock market.
Second Regression Model
S&P500 (Annual Average) = β0 + β1 * (Annual CPI) + β2 * (Annual Average House
Price Index) + β3 * (Annual Average Interest Rate) + β4 * (Average Annual
Unemployment Rate) + β5 * (Annual Average GDP of US) + β6 * (Annual Average GDP
of Germany) + β7 * (Annual Average GDP of China) After we run the regression of the
second model, it resulted in improving of our model accuracy. We excluded PPI, GDP of
Spain because it came out that these variables have no impact on the US stock market.
Also, we added the unemployment rate and GDP of China because it is the largest US
business partner.
Explanation of the new variables
Unemployment Rate is one of the most important factors of the economy’s
performance. High unemployment rate decreases the buyer power of the consumers.
2/3 of the US economy is consumer based and it influences the stock market
negatively. We assume that there is a relationship between these two variables.
Gross Domestic Product of China affects the US economy because cheap export from
China prevents inflation in the US. China is a huge buyer of the US Treasuries. It lowers
the interest rate and companies borrow money to invest in development hence, it directly
affects the stock market. We assume that GDP of China and US stock market move in
the same direction, meaning if China does well, it has money to buy US Treasuries.
Additionally, the US stock market increases because production of those US companies
that is outsourced to China grows.
Report Content
Suppose you have applied for a business analyst position at a prestigious firm and as
part of their hiring process, you have been requested by the Recruitment Panel to
analyze the data for a presentation to be made to the Panel.

Prepare a report that summarizes your analysis, including key statistical results,
conclusions and recommendations. Your report must also include a complete analysis and
clear interpretation of each one of the coefficients contained in the two studied models.
Include any technical material that you feel is appropriate in the appendix
Data ResourcesCPI
PPI
http://www.statista.com/statistics/193966/annual-changes-of-the-producer-price-index-for-commodities-
in-the-us-since-1990/
HPI
https://research.stlouisfed.org/fred2/series/USSTHPI/downloaddata
10-year annual treasury constant maturity rate
https://research.stlouisfed.org/fred2/series/DGS10/downloaddata
US GDP
http://www.multpl.com/us-gdp-growth-rate/table/by-year
Other countries GDP
https://data.oecd.org/gdp/gross-domestic-product-gdp.htm
US Unemployment Rate
http://data.bls.gov/pdq/SurveyOutputServlet
Rubrics
As mentioned in the course outline explained during the first day of classes, the written
report would represent 20% of your total course score.
Kindly check the below rubrics to ensure you understand how the case study assignment
will be assessed. Make sure you summarize all your data in an excel file that you will provide in the
appendix at the end of your report.
Although it’s a take home assignment, just be aware that plagiarism is a form of
cheating. The penalty for plagiarism is a mark of zero and possible expulsion from the
course. As emphasized during the lecture, it is anindividual assignment. Good luck!
Grading Rubrics for Case Study Report

Category of requirement Description of Requirements Tot

– Included all required parts

– Used proper format for cover page, table of contents, figures, references
Structure, format, references – The suggested format was used

– Ideas are conveyed efficiently and clearly

Clarity of ideas – Text is well written grammatically

– Problem statement is specific and clear

– Rationale is clear and logical
Problem Statement and – Research objectives are clear and logical
Rationale – Hypotheses are clearly done

– Provided references are correctly used

– articles are relevant
Literature Review or references – a critical analysis is done with proper comparison

– Properly explains research design

– Instruments and data collection plan are clearly explained
Research Design – Explains how data will be analysed

– Implication and limitations of the research is explained

Conclusion – Conclusion is precise an summarizes the results

Total