Various factors affecting the stock market

by

ACKNOWLEDGEMENT

This thesis would not have been possible without support of many people. I owe my greatest intellectual debt to my supervisor, whose encouragement, guidance, and sup- port at every stage of my research enabled me to develop an understanding of the subject. On a personal level, I owe my heartiest thanks to my parents.

DECLARATION

I adjudge that the entire content of this thesis is entirely my own work; the content used in this dissertation has not been submitted before in any educational institution and represents my own opinion.

Signed __________________ Date _________________

ABSTRACT

The aim of this study is to analyse the factors which affect the performance of stock market. Macroeconomic factors are important to policy makers because of their perceived importance in influencing stock prices and the direction of the economy. Knowledge of economic fundamentals will help businesses in their evaluation of stock prices and their determination of risk and return levels. After policy makers estimate the impact of macroeconomic factors, an even more important policy question is whether the development of new stock markets or the efficient functioning of current ones actually has a positive impact on economic growth. Furthermore, if policy makers have decided to establish stock markets, they may not be able to sustain their viability if the political, legal, and social institutions are not adequate or compatible with the functioning of modern capital markets. This research focuses on Sub-Sahara Africa from the point of view of the viability and historical performance of its stock markets because fewer academic studies have been devoted to this topic as compared to other regions of the world. The main focus of this thesis is to determine significant economic variables and institutional factors that impact stock markets development for the year 2006. The aim of time series analysis is to determine the effect of stock markets on GDP during the period 1990 to 2009. The findings of this study indicate that GDP and market capitalization are the key microeconomic variables which acts as a key factor for the performance of stock market. A variety of new financial instruments in stock markets and bond markets were expected to accelerate the growth of capital markets. But the results of this study do not point in that direction.

TABLE OF CONTENTS

ACKNOWLEDGEMENTII

DECLARATIONIII

ABSTRACTIV

CHAPTER # 1: INTRODUCTION1

Background of the Study1

Problem Statement3

Purpose of Study5

Rationale of the Study6

Significance of the Study7

Structure of the Thesis9

CHAPTER # 2: LITERATURE REVIEW10

Introduction10

The Stock Market (SM)10

Performance12

Stock Markets and Economic Growth16

Business, financial regulations and stock market development18

Sector Specific Index in Stock Markets21

Working of stock market index21

Construction of sector specific indexes22

Uses of sector specific indexes23

Market Capitalization Rule for Index Computation24

Anomaly24

Efficient Market27

Strong Efficient Market28

Size Effect30

Contrarian Strategy31

Difference between Internal and External Financing31

Examples32

External or debt financing33

Combined external funding34

Loan external funding34

Empirical Study on the Relationship between Financial Variables and Beta35

Liquidity36

Financial Leverage37

Efficiency38

Profitability39

Summary39

CHAPTER # 3: HYPOTHESIS DEVELOPMENT40

Introduction40

Theory of Efficient Market Hypothesis (EMH)40

Arbitrage Price Theory (APT)42

Related Empirical Studies43

Hypothesis Development44

CHAPTER # 4: METHODOLOGY46

Research Method46

Data Base47

Data: Variables47

Dependent Variables47

Market Capitalization47

Gross Domestic Product (GDP)48

Independent Variables48

Portfolio capital inflows48

Foreign Direct Investment (FDI)49

Inflation49

Stock market liquidity49

Data Analysis50

Regression Models50

Limitation of ...