RESEARCH METHODOLOGY

A STUDY ON THE IMPACT OF FOREIGN

MARKET ON INDIAN MARKET
CIA III

SUBMITTED TO:
PROF. RAJASHREE KAMATH K

SUBMITTED BY:
SHREYA KURIAN 1928051
C P PRATHIKA 1928132

Christ University, Bangalore

Model Diagram:

Historical Timeseries
data collected based
on real time market

Regression analysis
to understand the
relation and establish
a model

Factor analysis
To understand the
correlation between
the other indices

Get the best fit

model to predict the
Indian markets
Research Objective
 To achieve a predictive model inclusive of stock indexes of various countries
 To derive a relationship between the various indexes and SENSEX in accordance to
their performance.
Constraints:
Based on Individual stocks
- Demand and supply of individual stocks in a given market
- Earnings of companies
- Insider trading
Based on government data
- GDP
- RBI rates
- Inflation
- Change in government
Scope:
- The research will help us understand the basics of foreign indices
- Help in correlating the Indian market with few foreign markets
- Provide a predictive model that would help in hedging the market in future.

Data Description
1. Dependent Variable
SENSEX
SENSEX includes the 30 of the most traded stocks on the Bombay Stock Exchange and the
largest stocks which helps in knowing the performance of the Indian Economy. It is therefore
the benchmark index of the BSE in India. The 30 companies are selected on the basis of their
financial soundness. The base value of SENSEX is 100. The calculation is done using the free-
float market capitalization. It is considered to be the dependent variable in the study as the
changes according to how the other indexes are performing.
2. Independent Variables
a. NASDAQ
It is an electronic exchange wherein the stocks are traded through an automated network of
computers. It mainly includes three market tiers namely – Capital Market, Global Market,
Global Select Market. In terms of market capitalization of shares traded NASDAQ is ranked
second on the list of stock exchanges. Approximately there are 3500 listings on the index.
b. Nikkei
It is the Tokyo Stock Exchange and a price-weighted index wherein the stocks are traded in
Yen. The performance of 225 large, publicly owned companies are measured on this index.
The components of this exchange are reviewed once a year.
 c. HangSeng
It is a free float adjusted market capitalization weighted stock market index of Hong Kong and
is the main indicator of the overall market performance of Hong Kong. It helps in recording
the daily changes of some of the major companies of Hong Kong and their performance on a
daily basis. The 50 companies on this index account to58% of the overall stock market of Hong
Kong.
d. KOSPI
KOSPI refers to Korea Composite Stock Price Index and it is the representative stock market
index of South Korea. It has a base value of 100 and is calculated on the basis of market
capitalization. It includes the top 200 largest companies of Korea. It is one of the most actively
traded stocks of Korea. The KOSPI200 Index makes up for 90% of the KOSPI Index.
Source: https://finance.yahoo.com/world-indices/

Regression Analysis

Variables Entered/Removeda

Variables Variables Shows the Dependent and

Model Entered Removed Method
Independent variables used in the
test.
1 Kospi, Nikkei, . Enter
Hang Seng,
NASDAQb

a. Dependent Variable: Sensex

b. All requested variables entered.

The model predicts the changes in the Sensex according to the predictors as mentioned
previously mentioned.
 R represents the correlation between the predicted and the observed values. Our model
shows a low correlation between the predictors and the dependent variable. It shows a
correlation of 0.24 only.
 R square explains the proportion of variance in Sensex that can be explained by the
predictors. The above table shows that the variance is low.
 Regression maximizes R square and in our model, the adjusted R square is low which
shows that the predictions made are less accurate.
Anova table helps to identify whether the model is significant or not. It indicates whether or
not the predictor variables are good enough to predict the outcome variable. This is determined
by looking into the p value or significant value.
In this significant value is 0.006 which is lesser than 0.05, the alpha value and so it is
significant.
It can be reported as – F(4,235) = 3.669, p = 0.006

 The B coefficients shows how Sensex increases for each unit increase of each predictor.
Therefore, a unit increase of NASDAQ results in 0.87 increase in Sensex. Other than
Kospi, all other indexes show positive values. The negative value in Kospi indicates
that Sensex decreases when there is an increase in Kospi. However, an increase in
NASDAQ results in the highest increase in Sensex when compared to Nikkei and Hang
Seng.
 Sig holds the p values for our predictors. The b coefficient is said to be significant if the
respective p value is more than 0.05. In the above results it is found that all the b
coefficients are significant since all are above 0.05.
Factor analysis

Descriptive Statistics

Mean Std. Deviation Analysis N This table shows the number of

sample taken for each index (index
NASDAQ 8269.672207 550.8389548 240
price). The mean shows the yearly
Nikkei 22089.457568 1099.5318793 240
average price of an index while the
Hang Seng 27596.377132 1217.1004386 240
standard deviation signifies how
Kospi 2102.715501 159.1673706 240 much each price of an index varies
Sensex 38941.204932 3871.7570157 240 from the average price

Correlation Matrixa

NASDAQ Nikkei Hang Seng Kospi Sensex

NASDAQ 1.000 .573 -.058 .220 .200

Nikkei .573 1.000 .062 .212 .217

Correlation Hang Seng -.058 .062 1.000 .429 .058

Kospi .220 .212 .429 1.000 .071

Sensex .200 .217 .058 .071 1.000

NASDAQ .000 .186 .000 .001

Nikkei .000 .171 .000 .000

Sig. (1-tailed) Hang Seng .186 .171 .000 .187

Kospi .000 .000 .000 .136

Sensex .001 .000 .187 .136

a. Determinant = .468

The correlation matrix helps us understand how each variable is correlated to the other variable.
As per the table mentioned above we can deduce that KOSPI and HangSeng have better
correlation after NASDAQ and Nikkei. Whereas, the Sensex show very low level of correlation
in the matrix.

KMO and Bartlett's Test

Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .543

Approx. Chi-Square 179.392

Bartlett's Test of Sphericity df 10

Sig. .000
We have got the Kaiser-Meyer-Olkin Measure of Sampling Adequacy at 0.543 which is just
above the acceptable range while, 0.6 is usually considered the preferred value. This test
measures the proportion of variance among the variables that might be common variance.

Communalities

Initial Extraction The extraction values tells us the

NASDAQ 1.000 .738 proportion of variance for each
Nikkei 1.000 .713 variable that can be explained by
the factors. In this case the
Hang Seng 1.000 .774
extraction values are moderately
Kospi 1.000 .709
high for all the index except Sensex
Sensex 1.000 .233

Extraction Method: Principal

Component Analysis.

Total Variance Explained

Component Initial Eigenvalues Extraction Sums of Squared Loadings

Total % of Variance Cumulative % Total % of Variance Cumulative %

1 1.859 37.178 37.178 1.859 37.178 37.178

2 1.308 26.162 63.340 1.308 26.162 63.340
3 .891 17.825 81.165
4 .546 10.916 92.081
5 .396 7.919 100.000

Extraction Method: Principal Component Analysis.

We can see that SPSS has extracted two factors and the cumulative percentage is 63%. So,
these two factors explain 85% of the variance.

We can see that there are two factors

which were above 1 and all the other
potential factors were not extracted.
 Component Matrixa

Component
This table shows the correlation
1 2 between the extracted factors and
NASDAQ .759 -.402 the given indexes.
Nikkei .789 -.300
Hang Seng .331 .815
Kospi .592 .599
Sensex .447 -.182

Extraction Method: Principal

Component Analysis.
a. 2 components extracted.

Conclusion:

As per the results from SPSS, we can find a regression model but this model is highly
unreliable as Sensex has the least correlation when compared to the other indices. So, the
given regression model is not the best fit model.

Possible reasons could be:

- The index may have stocks which remain neutral to foreign markets.
- There might be major events in the country which do not affect the other markets
- Change of Government and monetary policies within the country

Hence, we can conclude that though the research tries gives us a best fit model, it does not
necessarily give a proper prediction of market.