1

RELATIONSHIP IN BETWEEN STOCK PRICE AND GDP

GROWTH RATE: DO THEY EFFECT BUSINESSES IN THE UK.

Empirical Method in Finance and Accounting

(ACCP009)
University of Stirling

Student ID – 2535853
Word Count – 2668 words
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TABLE OF CONTENT

INTRODUCTION…………………………………………………………………………………………………………………………………………………3
LITERATURE
REVIEW……………………………………………………………………………………………………………………………………………………………..4
METHODOLOGY……………………………………………………………………………………………………………………………………………..…6
STATIONARITY
TESTING………………………………………………………………………………………………………………………………………………….6
INTERPRETING THE JOHANSEN COINTEGRATION
TEST……………………………………………………………………………………………………………………………………………………….6
DATA AND LIMITATION……………………………………………………………………………………………………………………………………….8
CONCLUSION……………………………………………………………………………………………………………………………………………………..9
REFERENCES…………………………………………………………………………………………………………………………………………………….10
APPENDIX…………………………………………………………………………………………………………………………………………………………12

LIST OF FIGURES
Fig.1. GDP Growth Rate
UK………………………………………………………………………………………………………………………………………….4
Fig.2. UK FTSE 100 Stock Market Index……………………………………………………………………………………………………………….
……4
Fig. 3. FTSE 100 & UK
GDP……………………………………………………………………………………………………………………………………….5
Fig.4. Unit Root testing on FTSE100 (Log)
……………………………………………………………………………………………………………..…6
Fig.5. Unit Root testing on UKGDP (Log)……………………………………………………………………………………………………………..
…..6

 3

INTRODUCTION

The Gross Domestic Product is the financial estimation of every single completed goods and administrations
created by all specialists and organizations in UK. Business influences GDP because Its impact on business is
moderately minor from the point of view that GDP is made because of business action. In any case, GDP is a
large scale monetary pointer of the quality of business, relative abundance of specialists and the general
quality of the economy and is utilized by business and speculators to decide productive capital
arrangement (bizfluent.com). While, The FTSE 100 Index is a noteworthy securities exchange file which
tracks the execution of 100 most promoted organizations exchanged on the London Stock Exchange. The
organisations within speak to around 80 percent of the whole market capitalization of the London Stock
Exchange. It is a free-glide list. The FTSE 100 has a base estimation of 1000 as of January 3, 1984
(Tradingeconomics.com, 2018). One speaks to the execution of best 100 organizations in UK and the other
generally shows to the speculators that where UK remains in economy regarding its development. In this
manner, above mentioned topics is identified with each other since the two exhibitions discuss the UK all in
all.

This report will feature any connection between stock price and GDP growth of UK and how the high points
and low points can influence organizations. This report will provide relevant outcomes and evidence to
support it in literature section. Stationarity test will be tested on data derived from DataStream then
Cointegration testing will be performed using Johansen Cointegrating testing in methodology section. I will
leave remarks on results by anticipating and contrast my finding with different specialists to give my
discoveries a solid assistance.
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LITERATURE REVIEW
Fig.1. GDP Growth Rate UK
Prior to the Great Recession in ten
years, from 1999 to 2008, the UK's total
national output grew 2.8% by and large
f o r e v e r y y e a r. B e c a u s e o f
overinvestment in the lodging business
sector and customer's solid reliance
using a loan, the economy was hit hard
by the monetary emergency and the
credit crunch. In 2009, GDP fell 5.2%,
for the most part because of falling
private settled speculation. Be that as it
may, GDP bounced back in 2010 to a
1.7% development. In the three
resulting years, in any case,
development did not post figures as
solid as those before the emergency;
normal GDP development was 1.0% in the 2011– 2013 period (FocusEconomics | Economic Forecasts from
the World's Leading Economists, 2018). Besides, development in the most recent quarter was driven by
skilful, logical, organization and strengthen exercises inside the administrations segment.

Britain’s economy was weaker than previously thought in 2017, leaving the country lagging further behind
the global recovery as it prepares to leave the European Union.
Proceeding onward to the stock price execution of UK, Britain's biggest organizations are worldwide
players. The FTSE 100 work on a worldwide premise, drawing 70% of their incomes from outside of the UK.
For some financial specialists excessively careful, making it impossible to put specifically in developing
markets, purchasing FTSE 100 recorded stocks can offer access to the developing markets development
story, however with the solace of a level of corporate administration and straightforward investor dealings
that are maintained in created markets. Wage keeps on being the fundamental worry for financial
specialists in the UK, both in the keep running up to retirement, where profits reinvested can altogether
support add up to returns, and for those that have just begun illustration on their benefits profits can help
supplement their post-retirement pay (Ft.com., 2018).

Fig.2. UK FTSE 100 STOCK MARKET INDEX

Quarterly Performance of FTSE 100 The Index is contrasted with remote and household,
huge top and little top files. Amid the 10 years finished
8000
November of 2017, the FTSE 100 had a rank of 19 with
6000 an arrival of 14%. (Inc., S.,2018)

4000
According to the last year news on (Connington, J.,
2018)  the UK market currently sits at a price-to-
2000 earnings ratio of 23, significantly above the long-term
average of 15. However, when the market's "Cape1"
0 score or future earnings are looked at, the picture
Q1 1990 Q2 1994 Q3 1998 Q4 2002 Q1 2007 Q2 2011 Q3 2015
changes. Additionally, FTSE 100 earnings were
soar. They collapsed to £84bn in 2015 and £96bn in 2016, after the fall in the price of commodities hurt oil
and mining firms, which make up a large part of the index. In 2017 it hits to £191bn, and in 2018 that figure
is expected to rise again to £213bn. Unless the market rises rapidly in tandem, or the estimates prove
inaccurate, this will bring the price-to-earnings ratio back down towards the longer-term average.

1Cape is another version of the price-to-earnings metric but compares the average earnings over the past 10 years to today's share
price, with inflation accounted for. This is intended to smooth out the ups and downs of the business cycle.
 5

At the end of 2017, the ratio of market cap to GDP was high (Connington, J., 2018). This means corporate
profits must stay where they are to ensure the index maintains its current level, and the ratio of earnings
to GDP would have to move higher for the market to rise.

Over the decade, women had claimed only 22 per cent of all senior appointments and 83 per cent of those
positions were non-executive roles. Less than 7 per cent of the 151 chief executive appointments in that
time were women (Featherstone, E.,2018). Which may lead to not have skilled directors in the company to
make profitable decisions and can be one important thing that might count as negative point for FTSE is
that to attempts to improve gender diversity on the boards of FTSE 100 firms.

The International Monetary Fund (IMF) has downgraded expectations for UK GDP growth this year, saying
developments in Brexit negotiations remaining a "key uncertainty" for the economy as it stuck by its
previous economic forecast. A breakdown in Brexit negotiations was among the biggest risks to economic
growth, along with a decline in liquidity in the corporate bond market, high valuations of commercial real
estate and housing and lower household savings rate, the IMF said by (Emma Haslett, J., 2018).

The connection between Stock cost and GDP development is repeating question among experts and
financial specialists alike. While numerous cases that hypothetically the two figures ought to be the same,
other trust that there is no relationship by any means (Wise-owl.com, 2018). Many-sided quality of this
issue is high, and this disentangled approach may not so much give a sufficient correlation of these two
factors.

Hypothetically, stock cost increments ought to precisely coordinate genuine GDP growth. Likewise, finished
the long haul, total corporate profit rise when the economy develops or the other way around.
Nonetheless, a lot of illustrations which disengage the stock cost from GDP development. For example, in
short-run, Financial Crisis in 2008 and in only 6 years bull market saw the S&P 500 about triple, both did
not reflect GDP development which likewise implies that together these two factors don't influence
business' execution.
Fig.3. FTSE100 & UKGDP

This diagram indicates give a reasonable picture to

us these two variable has no connection in the
middle. Amid examine this report found a few
factors that shows disparities yet are not
constrained to, for example, Dividends, Dilution,
Expectations, Globalization, M& A movement,
Influence of Politics and Media, Valuations are
Volatile and Impact of Government Polices.
 6

METHODOLOGY
The literature part is surrounded by the movements in stock prices and fluctuation in growth rates of UK
influenced the business’s performance individually. Furthermore, the reviews of past studies provide us
with insight, guidance and reasoning as to behind all that changes. Fig.3. gives clear picture of the
relationship but for more clarity, the steps I used for this methodology section are; Unit Root Test (ADF and
PP), Johansen Cointegration Testing, Trace testing and, Maximum Eigenvalue testing and results are
provided at the end of every test.
This part of the report details all results from the testing I conducted. Results are presented since 1990 to
2017 (quarterly). All testing was conducted using Eviews 10-Student version statistical software.
Stationarity Testing

Before directing any test, some underlying testing of the time series is required called unit root. With a
specific end goal to approve this trademark in provided time series information, this report uses two
diverse unit root tests Augmented Dickey-Fuller Test (ADF) and Phillip-Perron Test (PP). This report
incorporates the two tests to guarantee precision since they are steady with each other. This survey will
test each time arrangement independently to guarantee non-stationarity at the levels of the information
and furthermore run the unit root tests on the main contrasts to guarantee I(1).

Null Hypothesis: FTSE100_1 has a unit root Null Hypothesis: UKGDP_1 has a unit root
Exogenous: Constant Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=12) Lag Length: 1 (Automatic - based on SIC, maxlag=12)

t-Statistic Prob.* t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -1.636849 0.4605 Augmented Dickey-Fuller test statistic -0.689248 0.8442
Test critical values: 1% level -3.490210 Test critical values: 1% level -3.490772
5% level -2.887665 5% level -2.887909
10% level -2.580778 10% level -2.580908

*MacKinnon (1996) one-sided p-values. *MacKinnon (1996) one-sided p-values.

Fig.4. Unit Root testing on FTSE100 (Log) Fig.5. Unit Root testing on UKGDP (log)

It is noticed that to choose each model's ideal lag length I augment the log-probability capacity of the
relating model. That is finished by choosing the model with the least Schwartz Bayesian Information
Criterion (SBIC) likewise crossed checked the outcomes utilizing Akaike Information Criterion (AIC)
guarantees accuracy.

Fig 3 and Fig 4 indicates unit root null hypothesis in the series, the assumption here just consistent and Lag
Length is 0 and 1. We dismiss the null hypothesis when log p-value is under 0.05 (5% significant level) and
Fig. 3 and Fig.4 give the p-value which is over 5% significant level 0.46 and 0.84 individually. Consequently,
we cannot dismiss the null hypothesis which implies the both series of stock price of the UK and GDP
development rate is non-stationary at level and null hypothesis is acknowledged in view of the random walk
model. Dickey Fuller have registered the basic estimations of the t-statistics considering Monte Carlo
recreations.

Result: ADF test appears for two series information as non-stationary, yet stationary after first difference.
The result in both cases is non-significant at all level. The outcomes are conventional and speaking by
itself. Additionally, PP test was likewise directed (allude Appendix 4) to affirm the test consequences of
ADF and guarantee non-stationarity.
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Interpreting the Johansen Cointegration Test

After checking the stationarity on information, accepting time series are incorporated of a similar request.
This report directed a Johansen test between FTSE 100 index and GDP development rate. As both log-level
series contain a unit root and we trust that Stock price and GDP is connected over the long haul in this way,
can test for cointegration and run the long-run relapse on both arrangement.

The procedure is a maximum probability technique that decides the quantity of cointegrating vectors in a
non-stationary time arrangement VAR (Vector Autoregression) with confinements forced, known as VEC
(Vector Error Correction) display.

Yt = A1yt-1 +…...+ Apyt-p + Bxt + et

Where Yt is a k-vector of non-stationary I(1) variables, xt is a d-vector of deterministic variables, and et is a

vector of innovations.
The report picks between utilizing SBIC and AIC data basis forms, in determinants of lag lengths for this
test. SBIC is typically more reliable yet wasteful, though AIC isn't as predictable yet is normally more
effective (Brooks, 2008 cited by Lup.lub.lu.se., 2018). I chose two arrangement information (FTSE100 and
GDP development rate) in this report.

According to Appendix 1, the test accept no pattern in the arrangement with a limited catch in the
cointegration connection (I processed the test utilizing assumption 2 in the discourse, Intercept (no
pattern) in CE - no capture in VAR), and utilizations one lag in contrasts (two lags in levels) which is
determined as "1 1" in the alter field.

It is two test measurements, one is Trace statistics and the other is maximum eigenvalue statistics. The
Trace Statistics tests the null speculation 'r' of no cointegration relations against the option of 'k'
cointegrating relations, where 'k' is the quantity of endogenous factors, for r=0, 1,… ..,k-1. The option of 'k'
cointegrating relations compares to the situation where none of the arrangement has a unit root and a
stationary VAR might be determined as far as levels of all the arrangement.

Coming about, P-value is more than 0.05 (5% significance level) in this manner we acknowledge the null
speculation of no cointegration relations. Then again, most extreme eigenvalue test gives same outcome.
Subsequently, the Johansen Cointegration Test (likewise allude Appendix 1) demonstrates that there is no
murmur of cointegration. If there is no cointegration then 'blunder' will have a stochastic pattern in it. In
this manner, regression must keep running in difference form.

I performed different tests, for example, Engle-Granger Cointegration Test and Phillips-Ouliaris utilizing
same information however the outcomes were the same as Johansen Cointegration Test (allude Appendix 2
and 3).

Result: There was no cointegration evident since 1990 in between FTSE100 and GDP of UK. Investors may
therefore derive benefits from splitting equity investments. The Trace and Eigenvalue Test indicates non-
existence of cointegrating equation at 5% significance level. Therefore, none of the test confirm a
cointegration relationship since 1990. The way that this report just investigated one market (UK) therefore
the results are limited, not exposed to other markets. Johansen test obvious that FTSE 100 and GDP are I(1)
that is stationary after first difference. As cointegration is the basic technique we use to dissect the
connections amongst business sectors and approach part appears there is no connection between the
business sectors (Ryan C. Fuhrmann, C., 2018)

As the results are not related to each other at all so forecasting for them as a group seemed meaningless.
 8

DATA AND LIMITATION

Data: The reason for choosing this market is that, I wanted to figure out how a business can be affected, if
there is relationship or not in between stock price and GDP growth of UK only. I wanted to know more and
in depth this market for my further projects.

Limitation: Following the study, several factors emerge that must be considered when making conclusions
form the results that were reached. As always, there are limitations in terms of the reliability and validity
of the results. This report separates these limitations into two distinct groups: model confinements and
Information impediment.

In this report, Model confinements are primarily identified with the utilization of the Johansen testing for
cointegration investigation. This technique has a high likelihood of creating outliners, and high changes. It
is likewise extremely touchy to the slack length chose for the VECM (Brook, 2008 cited by Lup.lub.lu.se.
2018). As a reality, cointegrating testing directing is static, and not precise as far as foreseeing
cointegrating connections later. In addition, there is less probability of no cointegrating relations and
greater plausibility of cointegrating is rejected. Different sorts of cointegrating tests take into
consideration more noteworthy clearness than Johansen technique since it has the trouble related with
deciphering comes about.
Information impediment is likewise one of the critical confinement. The investigation come as periods,
recurrence and number of the market tried. This report just encountered UK's market no other market,
which can bring about need precise results. Future examinations might need to define reliable records to
guarantee no data is lost attributable to unpredictable file development.
 9

CONCLUSION

This report has clearly presumed that there is no relationship at in FTSE100 index and GDP growth of UK,
which is also supported by literature part. It is difficult to state that business get influenced by them
together, though it is conceivable that organizations execution influenced by GDP development and Stock
price however separately which can likewise influence financial specialists’ choices to put resources into
UK, which is supported by the Johansen testing in methodology section. The results supported by numerous
Economists expressed that financial specialists remain to profit by broadening into outside business sectors
as they have truly demonstrated low connections. In short time span, there was sensational varieties of the
two key factors, particularly during huge unpredictability though in long run, there is more direct
relationship. Likewise, discoveries demonstrate that cointegration can be influenced by a monetary stun,
for example, the worldwide money related emergency in 2008. Persistent here and now testing of the
cointegrating connection between these investigations lists may reveal conceivable outcomes to make
overabundance return in the time of recuperation.
 10

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APPENDIX

Appendix 1 – Cointegration testing

Date: 04/15/18 Tim e: 15:09
Sam ple (adjus ted): 3 112
Included obs ervations : 110 after adjus tm ents
Trend as s um ption: Linear determ inis tic trend
Series : UK_GDP FTSE100
Lags interval (in firs t differences ): 1 to 1

Unres tricted Cointegration Rank Tes t (Trace)

Hypothes ized Trace 0.05

No. of CE(s ) Eigenvalue Statis tic Critical Value Prob.**

None 0.072987 8.397615 15.49471 0.4239

At m os t 1 0.000554 0.060960 3.841466 0.8050

Trace tes t indicates no cointegration at the 0.05 level

* denotes rejection of the hypothes is at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unres tricted Cointegration Rank Tes t (Maxim um Eigenvalue)

Hypothes ized Max-Eigen 0.05

No. of CE(s ) Eigenvalue Statis tic Critical Value Prob.**

None 0.072987 8.336655 14.26460 0.3455

At m os t 1 0.000554 0.060960 3.841466 0.8050

Max-eigenvalue tes t indicates no cointegration at the 0.05 level

* denotes rejection of the hypothes is at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unres tricted Cointegrating Coefficients (norm alized by b'*S11*b=I):

UK_GDP FTSE100
-2.08E-05 0.001276
1.96E-05 -0.000223

Unres tricted Adjus tm ent Coefficients (alpha):

D(UK_GDP) 77.63189 -39.67087

D(FTSE100) -95.37459 -2.474656

1 Cointegrating Equation(s ): Log likelihood -1776.041

Norm alized cointegrating coefficients (s tandard error in parenthes es )

UK_GDP FTSE100
1.000000 -61.22395
(11.8266)

Adjus tm ent coefficients (s tandard error in parenthes es )

D(UK_GDP) -0.001618
(0.00346)
D(FTSE100) 0.001988
(0.00072)
 13

Appendix 2 – Engle-Granger Cointegration Test

Date: 04/16/18 Tim e: 02:36
Series : UKGDP_1 FTSE100_1
Sam ple: 1 112
Included obs ervations : 112
Null hypothes is : Series are not cointegrated
Cointegrating equation determ inis tics : C
Autom atic lags s pecification bas ed on Schwarz criterion (m axlag=12)

Dependent tau-s tatis tic Prob.* z-s tatis tic Prob.*

UKGDP_1 -1.838585 0.6124 -6.825917 0.5756
FTSE100_1 -2.389295 0.3354 -10.31951 0.3283

*MacKinnon (1996) p-values .

Interm ediate Res ults :

UKGDP_1 FTSE100_1
Rho - 1 -0.061495 -0.092969
Rho S.E. 0.033447 0.038910
Res idual variance 0.001043 0.005438
Long-run res idual variance 0.001043 0.005438
Num ber of lags 0 0
Num ber of obs ervations 111 111
Num ber of s tochas tic trends ** 2 2

**Num ber of s tochas tic trends in as ym ptotic dis tribution

Appendix 3 – Phillips-Ouliaris Cointegration Test

Date: 04/16/18 Tim e: 02:46
Series : UKGDP_1 FTSE100_1
Sam ple: 1 112
Included obs ervations : 112
Null hypothes is : Series are not cointegrated
Cointegrating equation determ inis tics : C
Long-run variance es tim ate (Bartlett kernel, Newey-Wes t fixed bandwidth)
No d.f. adjus tm ent for variances

Dependent tau-s tatis tic Prob.* z-s tatis tic Prob.*

UKGDP_1 -1.781229 0.6405 -6.349224 0.6148
FTSE100_1 -2.384121 0.3378 -10.16418 0.3374

*MacKinnon (1996) p-values .

Interm ediate Res ults :

UKGDP_1 FTSE100_1
Rho - 1 -0.061495 -0.092969
Bias corrected Rho - 1 (Rho* - 1) -0.057200 -0.091569
Rho* S.E. 0.032113 0.038408
Res idual variance 0.001034 0.005389
Long-run res idual variance 0.000961 0.005299
Long-run res idual autocovariance -3.61E-05 -4.53E-05
Bandwidth NA NA
Num ber of obs ervations 111 111
Num ber of s tochas tic trends ** 2 2

**Num ber of s tochas tic trends in as ym ptotic dis tribution

 14

Appendix 4 – PP testing
Null Hypothes is : FTSE100_1 has a unit root
Exogenous : Cons tant
Bandwidth: 1 (Newey-Wes t autom atic) us ing Bartlett kernel

Adj. t-Stat Prob.*

Phillips -Perron tes t s tatis tic -1.621201 0.4684

Tes t critical values : 1% level -3.490210
5% level -2.887665
10% level -2.580778

*MacKinnon (1996) one-s ided p-values .

Res idual variance (no correction) 0.005673

HAC corrected variance (Bartlett kernel) 0.005421

Phillips -Perron Tes t Equation

Dependent Variable: D(FTSE100_1)
Method: Leas t Squares
Date: 04/16/18 Tim e: 08:16
Sam ple (adjus ted): 2 112
Included obs ervations : 111 after adjus tm ents

Variable Coefficient Std. Error t-Statis tic Prob.

FTSE100_1(-1) -0.034852 0.021292 -1.636849 0.1045

C 0.304845 0.180209 1.691619 0.0936

R-s quared 0.023991 Mean dependent var 0.010107

Adjus ted R-s quared 0.015037 S.D. dependent var 0.076588
S.E. of regres s ion 0.076010 Akaike info criterion -2.298062
Sum s quared res id 0.629742 Schwarz criterion -2.249242
Log likelihood 129.5425 Hannan-Quinn criter. -2.278257
F-s tatis tic 2.679274 Durbin-Wats on s tat 2.065973
Prob(F-s tatis tic) 0.104546