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A

Report on
"Relationship of Indian Stock market Index (BSE 30) with
World Stock markets Indices”

A Dissertation Submitted In Partial Fulfilment


Of
The Requirement For The Award Of MBA Degree Of
Bangalore University.

Submitted by

Mr. Aditya Modani


(REGD. NO: 06XQCM6002)

UNDER THE GUIDANCE & SUPERVISION OF


Dr. Nagesh Malavalli

M.P.BIRLA INSTITUTE OF MANAGEMENT


ASSOCIATE BHARTIYA VIDYA BHAVAN
43, RACE COURSE ROAD,
BANGALORE-560001
2006-2008

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DECLARATION

I, hereby, declare that this project report entitled, “Relationship of Indian Stock market
Index (Sensex 30) with World Stock markets Indices” Submitted in partial fulfillment
for the award of Master of Business Administration of Bangalore University is a record
of independent work carried out by me under the guidance of Dr. Nagesh Malavalli
faculty member, M. P. Birla Institute of Management, Bangalore.

I, also declare that this report is a result of my own effort and has not been submitted
earlier for the award of any degree or diploma of Bangalore University or any other
University.

Place: Bangalore Aditya Modani


Date: (REGD. NO: 06XQCM6002)

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ACKNOWLEDGEMENT

I am extremely grateful to all those who have shared their views, opinions, ideas and
experiences which have significantly improved my inputs for this Project.

I am indebted to my Internal guide Dr. Nagesh Malavalli for his encouragement and
support for the completion of the study.

I extended my sincere gratitude to our Principal Dr. Nagesh Malavalli.

Finally I would like to extend my warm respects and regards to my family, friends and
well-wishers for their constant support and valuable suggestions.

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Certificate
This is to certify that this report entitled, “Relationship of Indian Stock
market Indices (BSE 30) with World Stock markets Indices “is a
compilation of the project carried out by Mr. Aditya Modani (Reg. No.
06XQCM6002), a Student Executive of M.P. Birla Institute of Management,
Associate Bharatiya Vidya Bhavan, Bangalore.

Mr. Aditya Modani worked under my guidance and supervision.

Bangalore
Date:-
( Dr. Nagesh Malavalli )

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Certificate

This is to certify that this report entitled “Relationship of Indian Stock


market Indices (BSE 30) with World Stock markets Indices” is the
output of internship carried out by Mr. Aditya Modani, a Student Executive
of MP Birla Institute of Management, Bangalore under the guidance and
supervision of Dr. Nagesh Malavalli , MPBIM, Bangalore (Internal Guide)

Bangalore.
Date:- ( Dr.N. S. Malavalli)

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ABSTRACT

A stock market index is a listing of stock and a statistic reflecting the composite value
of its components. It is used as a tool to represent the characteristics of its component
stocks, all of which bear some commonality such as trading on the same stock market
exchange, belonging to the same industry, or having similar market capitalizations. Many
indices compiled by news or financial services firms are used to benchmark the
performance of portfolios such as mutual funds. The most regularly quoted market
indexes are broad-base indexes comprised of the stocks of large companies listed on a
nation's largest stock exchanges, such as the American NASDAQ Index, Korea’s
KOSPI, the German DAX, the Japanese Nikkei 225, the Indian Sensex and the Hong
Kong Hang Seng Index.

So whether there any correlation exists in all the world indices, have these global stock
indices have impact on our Indian Sensex. Is there any correlation exists between them
and they are shows some pattern based on the past movement.

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Table of Contents

CHAPTERS PARTICULARS PAGE NO’S


ABSTRACT
1 INTRODUCTION 1-27
Introduction 1
Market profiles 6
Background of the study 23
Purpose of the study 23
Problem statement 23
Objectives of the study 24
Significance of the study 24
Theoretical Framework 25
2 REVIEW OF LITERATUR 28-31
3 METHODOLOGY 32-39
Study Type 33
Data Profile 33
Data Gathering Procedure 33
Data source 34
Hypothesis of the study 34
Testing of hypothesis 35
Description of tools used 35
Procedure 38
Limitations of stydy 39
4 ANALYSIS AND INTERPRETATION 40-55
5 CONCLUSION 56-57
Conclusions 57
BIBLIOGRAPHY 59

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List of Charts

PARTICULARS PAGE NO’S

Chart Showing Correlation Between Sensex & Nikkei 41

Chart Showing Correlation Between Sensex & Hangseng 42

Chart Showing Correlation Between Sensex & Starits Times Index 43

Chart Showing Correlation Between Sensex & Nasdaq 44

Chart Showing Correlation Between Sensex & Dow Jones 45

Chart Showing Correlation Between Sensex & Kospi 46

Chart Showing Correlation Between Sensex & DJ Stoxx 47

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Chapter-1

INTRODUCTION

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Introduction

A stock index is a compilation of several stock prices into a single number. Indexes come
in various shapes and sizes. Some are broad-based and measure moves in broad, diverse
markets. Others are narrow-based and measure more specific industry sectors of the
marketplace. Understand that it is not the number of stocks that comprise the average that
determine if an index is broad-based or narrow-based, but rather the diversity of the
underlying securities and their market coverage. Different stock indexes can be calculated
in different ways. Accordingly, even where indexes are based on identical securities, they
may measure the relevant market differently because of differences in methods of
calculation.

Capitalization-Weighted

An index can be constructed so that weightings are biased toward the securities of larger
companies, a method of calculation known as capitalization-weighted. In calculating the
index value, the market price of each component security is multiplied by the number of
shares outstanding. This will allow a security's size and capitalization to have a greater
impact on the value of the index.

Equal Dollar-Weighted

Another type of index is known as equal dollar-weighted and assumes an equal number
of shares of each component stock. This index is calculated by establishing an aggregate
market value for every component security of the index and then determining the number
of shares of each security by dividing this aggregate market value by the current market

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price of the security. This method of calculation does not give more weight to price
changes of the more highly capitalized component securities.

Other Types

An index can also be a simple average: calculated by simply adding up the prices of the
securities in the index and dividing by the number of securities, disregarding numbers of
shares outstanding. Another type measures daily percentage movements of prices by
averaging the percentage price changes of all securities included in the index.

Adjustments & Accuracy

Securities may be dropped from an index because of events such as mergers and
liquidations or because a particular security is no longer thought to be representative of
the types of stocks constituting the index. Securities may also be added to an index from
time to time. Adjustments to indexes might be made because of such substitutions or due
to the issuance of new stock by a component security. Such adjustments and other similar
changes are within the discretion of the publisher of the index and will not ordinarily
cause any adjustment in the terms of outstanding index options. However, an adjustment
panel has authority to make adjustments if the publisher of the underlying index makes a
change in the index's composition or method of calculation that, in the panel's
determination, may cause significant discontinuity in the index level.

Finally, an equity index will be accurate only to the extent that:

• the component securities in the index are being traded


• the prices of these securities are being promptly reported
• The market prices of these securities, as measured by the index, reflect price
movements in the relevant markets.

Stock market indexes may be classified in many ways.

A broad-base index represents the performance of a whole stock market — and by proxy,
reflects investor sentiment on the state of the economy. The most regularly quoted market

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indexes are broad-base indexes comprised of the stocks of large companies listed on a
nation's largest stock exchanges, such as the American NASDAQ and S&P 500 Index,
the Korea’s KOSPI , the German DAX, the Japanese Nikkei 225, the Indian Sensex and
the Hong Kong’s Hang Seng Index.

An index may also be classified according to the method used to determine its price. In a
Price-weighted index such as the Dow Jones Industrial Average the price of each
component stock is the only consideration when determining the value of the index. Thus,
price movement of even a single security will heavily influence the value of the index
even though the dollar shift is less significant in a relatively highly valued issue, and
moreover ignoring the relative size of the company as a whole. In contrast, a market-
value weighted or capitalization-weighted index such as the Hang Seng Index factors in
the size of the company. Thus, a relatively small shift in the price of a large company will
heavily influence the value of the index. In a market-share weighted index, price is
weighted relative to the number of shares, rather than their total value.

Traditionally, capitalization- or share-weighted indices all had a full weighting i.e. all
outstanding shares were included. Recently, many of them have changed to a float-
adjusted weighting which helps indexing.

Therefore from the above we can say that all the world markets must be following any of
the above mentioned methods. As we all say that now due to globalization world
economies have came together and any effect in the economy of any country will have
effect on the economy of the other countries. A slow done in one major economy will
have its impact on the other economies.

So now to check that whether there is any relationship exist be between the world stock
indices with the Indian stock index. Now the problem set arises that whether the impact
on the one market will be the same as compared to the other.

To check the impact that where there is any correlation exits between the market and the
change in one market will lead the change in other considered market.

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Here in the I have taken the comparison among the Indian market with the other world
market to check whether the Indian stock index also reacts with the other world indices
and try to prove the relationship among them using the regression model developed with
market variation data.

Market Taken under consideration

¾ Sensex
¾ Nikkei 225
¾ Hang Seng
¾ KOSPI
¾ Dow Jones
¾ NASDAQ
¾ Strait T
¾ DJ STOXXX

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Bombay Stock Exchange
The Bombay Stock Exchange Limited popularly called BSE is the oldest stock exchange
in Asia. It is also the biggest stock exchange in the world in terms of listed companies
with 4,800 listed companies as of August 2007. It is located at Dalal Street, Mumbai,
India. In October 2007, the equity market capitalization of the companies listed on the
BSE was US$ 1.61 trillion, making it the largest stock exchange in South Asia and the
tenth largest in the world.

The BSE was established in 1875. Around 4,800 Indian companies list on the stock
exchange and it has a significant trading volume. The BSE SENSEX (SENSitive indEX),
also called the "BSE 30", is a widely used market index in India and Asia. Though many
other exchanges exist, BSE and the National Stock Exchange of India account for most of
the trading in shares in India.

Singapore Exchange (SGX) acquired a strategic investment in Bombay Stock Exchange


ltd. (5%) for US$42.7m. It is consistent with the strategy of building an Asian Gateway
for securities and derivatives. BSE is also considering taking part of the capitalization of
the rising ascension of its partner, Singapore Exchange, which is becoming a leading
financial hub in Asia-Pacific.

The BSE SENSEX is a value-weighted index composed of thirty scripts, with the base
April 1979 = 100. The set of companies which make up the index has been changed only
a few times in the last twenty years. These companies account for around one-fifth of the
market capitalization of the BSE.

This new system was unveiled on December 15, 2006, when Dr Prannoy Roy, the
Managing Director of New Delhi Television (NDTV) Ltd, struck the BSE's opening bell.

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Mr. Damodaran, the Chairman of the Securities and Exchange Board of India (SEBI),
said that the ticker would provide information and analysis of the financial world.

Following is the timeline on the rise and rise of the Sensex through Indian stock market
history.

1000, July 25, 1990 On July 25, 1990, the Sensex touched the magical four-digit
figure for the first time and closed at 1,001 in the wake of a good monsoon and
excellent corporate results.

2000, January 15, 1992 On January 15, 1992, the Sensex crossed the 2,000-mark
and closed at 2,020 followed by the liberal economic policy initiatives undertaken
by the then finance minister and current Prime Minister Dr Manmohan Singh.
3000, February 29, 1992 On February 29, 1992, the Sensex surged past the 3000
mark in the wake of the market-friendly Budget announced by the then Finance
Minister, Dr Manmohan Singh.

4000, March 30, 1992 On March 30, 1992, the Sensex crossed the 4,000-mark
and closed at 4,091 on the expectations of a liberal export-import policy. It was
then that the Harshad Mehta scam hit the markets and Sensex witnessed unabated
selling.

5000, October 8, 1999 On October 8, 1999, the Sensex crossed the 5,000-mark as
the BJP-led coalition won the majority in the 13th Lok Sabha election.
6000, February 11, 2000 On February 11, 2000, the InfoTech boom helped the
Sensex to cross the 6,000-mark and hit and all time high of 6,006.

7000, June 20, 2005 On June 20, 2005, the news of the settlement between the
Ambani brothers boosted investor sentiments and the scripts of RIL, Reliance
Energy, Reliance Capital, and IPCL made huge gains. This helped the Sensex
crossed 7,000 points for the first time.
8000, September 8, 2005 On September 8, 2005, the Bombay Stock Exchange's
benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk
buying by foreign and domestic funds in early trading.

9000, November 28, 2005 The Sensex on November 28, 2005 crossed the
magical figure of 9000 to touch 9000.32 points during mid-session at the Bombay

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Stock Exchange on the back of frantic buying spree by foreign institutional
investors and well supported by local operators as well as retail investors.
10,000, February 6, 2006 The Sensex on February 6, 2006 touched 10,003 points
during mid-session. The Sensex finally closed above the 10K-mark on February 7,
2006.

11,000, March 21, 2006 The Sensex on March 21, 2006 crossed the magical
figure of 11,000 and touched a life-time peak of 11,001 points during mid-session
at the Bombay Stock Exchange for the first time. However, it was on March 27,
2006 that the Sensex first closed at over 11,000 points.

12,000, April 20, 2006 The Sensex on April 20, 2006 crossed the 12,000-mark
and closed at a peak of 12,040 points for the first time.

13,000, October 30, 2006 The Sensex on October 30, 2006 crossed the magical
figure of 13,000 and closed at 13,024.26 points, up 117.45 points or 0.9%. It took
135 days for the Sensex to move from 12,000 to 13,000 and 123 days to move
from 12,500 to 13,000.

14,000, December 5, 2006 The Sensex on December 5, 2006 crossed the 14,000-
mark to touch 14,028 points. It took 36 days for the Sensex to move from 13,000
to the 14,000 mark.

15,000, July 6, 2007 The Sensex on July 6, 2007 crossed the magical figure of
15,000 to touch 15,005 points in afternoon trade. It took seven months for the
Sensex to move from 14,000 to 15,000 points.
16,000, September 19, 2007 The Sensex scaled yet another milestone during
early morning trade on September 19, 2007. Within minutes after trading began,
the Sensex crossed 16,000, rising by 450 points from the previous close. The 30-
share Bombay Stock Exchange's sensitive index took 53 days to reach 16,000
from 15,000.

17,000, September 26, 2007 The Sensex scaled yet another height during early
morning trade on September 26, 2007. Within minutes after trading began, the
Sensex crossed the 17,000-mark . Some profit taking towards the end, saw the
index slip into red to 16,887 - down 187 points from the day's high. The Sensex
ended with a gain of 22 points at 16,921.

18,000, October 09, 2007 The BSE Sensex crossed the 18,000-mark on October
09, 2007. It took just 8 days to cross 18,000 points from the 17,000 mark. The
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index zoomed to a new all-time intra-day high of 18,327. It finally gained 789
points to close at an all-time high of 18,280. The market set several new records
including the biggest single day gain of 789 points at close, as well as the largest
intra-day gains of 993 points in absolute term backed by frenzied buying after the
news of the UPA and Left meeting on October 22 put an end to the worries of an
impending election.

19,000, October 15, 2007 The Sensex crossed the 19,000-mark backed by revival
of funds-based buying in blue chip stocks in metal, capital goods and refinery
sectors. The index gained the last 1,000 points in just four trading days. The index
touched a fresh all-time intra-day high of 19,096, and finally ended with a smart
gain of 640 points at 19,059.The Nifty gained 242 points to close at 5,670.

20,000, October 29, 2007 The Sensex crossed the 20,000 mark on the back of
aggressive buying by funds ahead of the US Federal Reserve meeting. The index
took only 10 trading days to gain 1,000 points after the index crossed the 19,000-
mark on October 15.

21,000, January 8, 2008 The sensex crossed the 21,000 mark in intra-day trading
after 49 trading sessions. This was backed by high market confidence of increased
FII investment and strong corporate results for the third quarter. However, it later
fell back due to profit booking.
The biggest fall / black days in the history of BSE
¾ Jan 21, 2008 - 1,408.35 points

¾ Mar 17, 2008 - 951.03 points


¾ Mar 3, 2008 - 900.84 points

¾ Jan 22, 2008 - 875.41 points

¾ Feb 11, 2008 - 833.98 points

¾ May 18, 2006 - 826.38 points

¾ Mar 13, 2008 - 770.63 points

¾ Dec 17, 2007 - 769.48 points

¾ Oct 17, 2007 - 717.43 points

¾ Jan 18, 2007 - 687.82 points

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Hang Seng Index

The Hang Seng Index a free float-adjusted market capitalization-weighted stock market
index in Hong Kong. It is used to record and monitor daily changes of the largest
companies of the Hong Kong stock market and is the main indicator of the overall market
performance in Hong Kong. These 40 companies represent about 65% of capitalization of
the Hong Kong Stock Exchange.

HSI was started on November 24, 1969, and is currently compiled and maintained by HSI
Services Limited, which is a wholly owned subsidiary of Hang Seng Bank, the largest
bank registered and listed in Hong Kong in terms of market capitalization. It is
responsible for compiling, publishing and managing the Hang Seng Index and a range of
other stock indexes, such as Hang Seng China AH Index Series, Hang Seng China
Enterprises Index, Hang Seng China H-Financials Index, Hang Seng Composite Index
Series, Hang Seng Free float Index Series and Hang Seng Total Return Index Series.

When the Hang Seng Index was first published, its base of 100 points was set equivalent
to the stocks' total value as of the market close on July 31, 1964. Its all-time low is 58.61
points, reached retroactively on August 31, 1967, after the base value was established but
before the publication of the index.

The Hang Seng passed the 10,000 point milestone for the first time in its history on
December 10, 1993 and, 13 years later, passed the 20,000 point milestone on December
28, 2006.

In less than 10 months, it passed the 30,000 point milestone on October 18, 2007. Its all-
time highs, set on October 30, 2007, are 31,958.41 points during trading and 31,638.22
points at closing.

From October 30, 2007 thru March 9, 2008, the index lost 9,426 points or approximately
30% of its value wiping out hundreds of billions of investor wealth.

The Hang Seng stock average fell more than 3.5 percent at 22,574 on March 13, 2008, in
the wake of Wall Street's retreat from its biggest rally in five years, with regional
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investors worried by the continued slide in the United States dollar and ongoing troubles
in the Economy of the United States.

Hong Kong's Hang Seng index plunged as much as 5.4 percent before trimming some
losses to trade at 21,304.38, down 4.2 percent, on March 17, 2008, after JPMorgan Chase
told it would acquire troubled U.S. investment bank Bear Stearns, signaling to investors
the depths of the U. S.-Subprime mortgage crisis.

The Hang Seng index fell 4.4 percent to 20,896.14 on March 20, 2008 amid mounting
worries over the likely impact of a U.S. recession on China's own booming economy.

The Hang Seng index jumped 4.5 percent on March 25, 2008 to 22,063.11. Reasons for
the surge were encouraging data concerning the United States housing data and a rally on
Wall Street. Investors were in a good mood: A new agreement will give Bear Stearns
shareholders five times the payout that was set in a JPMorgan Chase March 16, 2008-
buyout deal.

HSI constituent stocks are selected with the use of extensive analysis, together with
external consultation. To be qualified for selection, a company:

ƒ Must be among those that comprise top 90% of the total market value of all
ordinary shares;
ƒ Must be among those that comprise top 90% of the total turnover on the Stock
Exchange of Hong Kong Limited
ƒ Should have a listing history of 24 months or meet the requirements of the
following

The current Hang Seng Index is calculated from this formula:

Descriptions on parameters:

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ƒ P(t) :Current Price at Day t

ƒ P(t-1):Closing Price at Day (t-1)

ƒ IS :Issued Shares

ƒ FAF :Free float-adjusted Factor, which is between 0 and 1, adjusted

every six months

ƒ CF :Cap Factor, which is between 0 and 1, adjusted every six months

The representativeness of the HSI can be studied by the turnover of the whole stock
market and by how much its market capitalization covers. The aggregate market value of
the HSI constituent stocks is maintained at approximately 70% of the total market value.
This coverage ratio is a positive sign when compared with major overseas stock indices.

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KOSPI

The Korea Composite Stock Price Index or KOSPI is the index of all common stocks
traded on the Stock Market Division previously, Korea Stock Exchange of the Korea
Exchange. It's the representative stock market index of South Korea, like the Dow
average in U.S.

KOSPI was introduced in 1983 with the base value of 100 as of January 4, 1980. It's
calculated based on market capitalization. As of 2007, KOSPI's daily volume is hundreds
of millions of shares or (trillions of won).

KOSPI was introduced in 1983, replacing Dow-style KCSPI

For decades, KOSPI moves below 1,000, peaking above 1,000 in April 1989, November
1994, and January 2000.

On June 17, 1998, KOSPI recorded its largest one-day percentage gain of 8.50% (23.81
points), recovering from the bottom of the Asian financial crisis.

On September 12, 2001, KOSPI had its largest one-day percentage drop of 12.02%
(64.97 points) just after 9/11.

On February 28, 2005, KOSPI closed at 1,011.36. It then plunged to 902.88 until April.
But unlike previous bull traps, it kept moving upward breaking the long-standing 1,000
point resistance level.

In November 2005, the index's Korean name was officially changed to Koseupi jisu

On July 24, 2007, KOSPI broke 2,000 levels for the first time. On July 25 it closed at
2,004.22.

On August 16, 2007, the largest one-day point drop of 125.91 (6.93%) occurred while the
Western subprime mortgage crisis worsened. Then on August 20, the index recovered

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93.20 (5.69%), its largest one-day point gain, after the U.S. Federal Reserve lowered the
discount rate.

As of October 2007, KOSPI has over 700 components. Top 10 stocks by market
capitalization are:

ƒ Samsung Electronics (005930)


ƒ POSCO (005490)
ƒ Hyundai Heavy Industries (009540)
ƒ Kookmin Bank (060000)
ƒ Korea Electric Power (015760)
ƒ Shinhan Financial Group (055550)
ƒ SK Telecom (017670)
ƒ Woori Finance Holdings (053000)
ƒ LG.Philips LCD (034220)
ƒ Hyundai Motor (005380)

KOSPI 200

The KOSPI 200 index consists of 200 big companies of the Stock Market Division. The
base value of 100 was set on January 3, 1990. It has over 70% market value of the
KOSPI, and so moves along the KOSPI index. KOSPI 200 is important because it's listed
on futures and option markets and is actively traded—one of the most actively traded
index in the world.

Its all-time low is 31.96, reached on June 16, 1998 during the financial crisis. It closed
above 200 for the first time on April 24, 2007.

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Nikkei 225
Nikkei225 is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei
average is the most watched index of Asian stocks. It has been calculated daily by the
Nihon Keizai Shimbun (Nikkei) newspaper since 1971. It is a price-weighted average
(the unit is Yen), and the components are reviewed once a year.

The Nikkei 225 began to be calculated on September 7, 1950, retroactively calculated


back to May 16, 1949.

The Nikkei average hit its all-time high on December 29, 1989 when it reached an intra-
day high of 38,957.44 before closing at 38,915.87. Its high for the 21st century stands just
above 18,300 points.
Stocks are weighted on the Nikkei 225 by giving an equal weighting based on a par value
of 50 yen per share. Events such as stock splits, removals and additions of constituents
impact upon the effective weighting of individual stocks and the divisor. The Nikkei 225
is designed to reflect the overall market, so there is no specific weighting of industries.

The Nikkei 225 stock average fell 3.3 percent to close at 12,433.4, its lowest close in 2-
1/2 years on March 13, 2008, in the wake of Wall Street's retreat from its biggest rally
since 2003, with regional investors worried by the continued slide in the United States
dollar and ongoing troubles in the Economy of the United States. The Nikkei 225 index
sank 4.5 percent in early afternoon trading to 11,691.00 points, its lowest since July 2005,
on March 17, 2008, after JPMorgan Chase told it would acquire troubled U.S. investment
bank Bear Stearns, signaling to investors the depths of the Subprime mortgage crisis. The
Nikkei 225 closed up 176.65 points, or 1.5 percent, at 11,964.16 on March 18, 2008 as
concerns persisted among investors about the health of the Economy of the United States.

Stocks are reviewed annually and announcements of review results are made in
September. Changes, if required, are made at the beginning of October. Changes may
also take place at any time if a stock is found to be ineligible for the Stock Average e.g.

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delistings, etc. All proposed changes will be announced in Nikkei's Japanese newspapers
and will appear on NNI.

Dow Jones Industrial Average

The Dow Jones Industrial Average also called the DJIA, Dow 30, or informally the Dow
Jones or The Dow is one of several stock market indices created by nineteenth century
Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. Dow
compiled the index as a way to gauge the performance of the industrial component of
America's stock markets. It is the second oldest continuing U.S. market index, after the
Dow Jones Transportation Average, which Dow also created.

Today, the average consists of 30 of the largest and most widely held public companies in
the United States. The "industrial" portion of the name is largely historical—many of the
30 modern components have little to do with heavy industry. The average is price-
weighted. To compensate for the effects of stock splits and other adjustments, it is
currently a scaled average, not the actual average of the prices of its component stocks—
the sum of the component prices is divided by a divisor, which changes whenever one of
the component stocks has a stock split or stock dividend, to generate the value of the
index.

The Dow fell 14.3% after the September 11, 2001 attacks. Exchanges were closed
between September 10th and September 17th.

The DJIA was first published in Customer's Afternoon Letter. It was published on May
26, 1896, and represented the average of twelve stocks from various important American
industries. Of those original twelve, only General Electric is currently part of the average.

When it was first published, the index stood at 40.94. It was computed as a direct
average, by first adding up stock prices of its components and dividing by the number of
stocks in the index. The Dow averaged 5.3% compounded annually for the 20th century,

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a record Warren Buffett called "a wonderful century"—when he calculated that to
achieve that return again, the index would need to reach nearly 2,000,000 by 2100.

ƒ The index hit its all-time low of 28.48 during the summer of 1896.

ƒ On November 21, 1995 the DJIA closed above 5,000 (5,023.55) for the first time.
ƒ On March 29, 1999, the average closed above the 10,000 mark (10,006.78) after
flirting with it for two weeks. This prompted a celebration on the trading floor,
complete with party hats.
ƒ On May 3, 1999, the Dow achieved its first close above 11,000 (11,014.70).

The uncertainty of the 2000s brought a significant bear market, followed by indecision on
whether the following bull market represented just a prolonged cyclical rally or the start
of a new secular trend.

ƒ On January 14, 2000, the DJIA reached a record high of 11,750.28 in trading
before settling at a record closing price of 11,722.98; these two records would not be
broken until October 3, 2006.
ƒ The largest one-day point gain in the Dow, an advance of 499.19, or 4.93%,
occurred on March 16, 2000, as the broader market approached its top.
ƒ The largest one-day point drop in DJIA history occurred on September 17, 2001,
the first day of trading after the September 11, 2001 attacks, when the Dow fell
684.81 points, or 7.1%. By the end of that week, the Dow had fallen 1,369.70 points,
or 14.3%. A recovery attempt allowed the average to close the year above 10,000.
ƒ By mid-2002, the average had returned to its 1998 level of 8,000.
ƒ On October 9, 2002, the DJIA bottomed out at 7,286.27 (intra-day low 7,197.49),
its lowest close since October 1997.
ƒ By the end of 2003, the Dow returned to the 10,000 level.
ƒ On January 9, 2006 the average broke the 11,000 barrier for the first time since
June 2001.
ƒ In October 2006, four years after its bear market low, the DJIA set fresh record
theoretical, intra-day, daily close, weekly, and monthly highs for the first time in

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almost seven years, closing above 12,000 for the first time on the 19th anniversary of
Black Monday.
ƒ On February 27, 2007, the Dow Jones Industrial Average fell 3.3% (415.30
points), its biggest point drop since 2001. This move was part of a correction that
eventually reached below the 12,000 level. It foreshadowed increased levels of
volatility not seen since March 2003, including routine 1% moves and occasional
moves of greater than 2% in a single session, which continued throughout the year.
The initial drop was caused by a global sell-off after Chinese stocks experienced a
mini-crash.
ƒ On April 25, 2007, the Dow passed 13,000 in trading and closed above the
milestone for the first time. Less than three months later, on July 19, the average set
an all-time closing high above the 14,000 level: the fastest 1,000-point advance for
the index since 1999.
ƒ On July 26, 2007, the DJIA experienced a 450 point intraday loss, followed by a
partial recovery of 311.50 points, to close at 13,473.57. This came on the heels of
turbulence in the U.S. sub-prime mortgage market and the soaring value of the Yuan.
The move initiated another correction falling below the 13,000 mark, about 10% from
the highs.
ƒ On September 18, 2007, the Federal Reserve cut its overnight interest rate and
discount rate targets by half a percentage point each to 4.75% and 5.25%,
respectively. In response, the Dow gained 335.97 points (2.5%), its largest one-day
jump since October 15, 2002 and its biggest percent rise since April 2, 2003.
ƒ On March 11, 2008, stocks rallied as investors welcomed news that the Federal
Reserve will lend up to $200 billion to banks and lenders as a means of loosening up
tight credit markets. It was Dow's best day since July 2002.

The DJIA is criticized for being a price-weighted average, which gives relatively
higher-priced stocks more influence over the average than their lower-priced
counterparts.

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NASDAQ Composite

The Nasdaq Composite is a stock market index of all of the common stocks and similar
securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the
NASDAQ stock market, meaning that it has over 3,000 components. It is highly followed
in the U.S. as an indicator of the performance of stocks of technology companies and
growth companies. Since both U.S. and non-U.S. companies are listed on the NASDAQ
stock market, the index is not an exclusively U.S. index.

The NASDAQ Composite from 1971 until April, 2007

Launched in 1971 with a base value of 100 points, the Nasdaq Composite Index is a
broad based index which is calculated under a market capitalization weighted
methodology. To be eligible for inclusion in the Composite, a security's U.S. listing must
be exclusively on the NASDAQ Stock Market (unless the security was dually listed on
another U.S. market prior to 2004 and has continuously maintained such listing), and
have a security type of either:

ƒ American Depositary Receipts (ADRs)


ƒ Common Stock
ƒ Limited Partnership Interests
ƒ Ordinary Shares
ƒ Real Estate Investment Trusts (REITs)
ƒ Shares of Beneficial Interest (SBIs)

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ƒ Tracking Stocks

Closed-end funds, convertible debentures, exchange traded funds, preferred stocks,


rights, warrants, units and other derivative securities are not included. If at any time a
component security no longer meets the above criteria, the security becomes ineligible for
inclusion in the Composite Index and is removed.

• On July 17, 1995, the index closed above the 1,000 mark for the first time.
• The all-time low for the index had been reached in October 1974 around 54
points, representing a market drop of more than 45% from the time of its
introduction.
• On March 10, 2000, the index peaked at an intra-day high of 5,132.52, and closed
at an all-time high of 5,046; the decline from this peak signaled the beginning of
the end of the dot-com stock market bubble.
• The index declined to half its value within a year, and finally found a bear market
bottom on October 10, 2002 with an intra-day low of 1,108.49 after a close of
1,114 the previous day.
• While the index gradually recovered since then, it did not trade for more than half
of its peak value until May 2007.
• The index opened the fourth quarter of 2007 with new 80-month highs, closing
above the 2,800 point mark on October 9, 2007.
• The intraday level of 2,861.51 on October 31, 2007 was the highest point reached
on the index since January 24, 2001.

While increased anxiety over high energy prices and the possibility of recession
dropped the NASDAQ well into correction territory in early 2008, a bear market
was finally recognized on February 6th, 2008 when the NASDAQ closed below
the 2,300 level, about 20% below the recent highs.

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Dow Jones STOXX 50
The Dow Jones STOXX 50 Index, Europe's leading Blue-chip index, provides a
representation of super sector leaders in Europe. The index covers 50 stocks from 18
European countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland and the United Kingdom.

The Dow Jones STOXX 50 Index is licensed to financial institutions to serve as


underlying for a wide range of investment products such as Exchange Traded Funds
(ETFs), Futures and Options, and structured products worldwide.

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Straits Times Index

The Straits Times Index (STI) is a market value-weighted stock market index based on
the stocks of 30 representative companies listed on the Singapore Exchange.

Launched in the wake of a major sectoral re-classification of listed companies by the


Singapore Exchange, which saw the removal of the "industrials" category, the STI
replaced the Straits Times Industrials Index (STII), and began trading 31 August 1998 at
885.26 points, in continuation of where the STII left off. Then, it represented 78% of the
average daily traded value over a 12-month period and 61.2% of total market
capitalization on the exchange.

Constructed by the Singapore Press Holdings, the Singapore Exchange and Professor Tse
Yiu Kuen from the Singapore Management University, it comes under formal review at
least once annually, and may also be reviewed on an ad-hoc basis when necessary. One
such review, for instance, raised the number of stocks from 45 to 50, which took effect
when trading resumed on 18 March 2005. This change reduced the index representation
of the average daily traded value to 60%, while increasing its total market capitalization
to 75%.

New additions included after 5 February 2007 include Thai Beverage, Suntec REIT,
Olam, Genting International, Labroy Marine and CapitaCommercial Trust. BIL, Dairy
Farm, Haw Par Corporation and TPV Technology will be removed from the list.

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The Singapore Exchange, London's FTSE Group, and Singapore Press Holdings
announced on 6 June 2007 that the Straits Times Index will be set for a major overhaul by
the end of 2007. The number of component stocks will be reduced from 50 to 30 and at
the same time, 18 new indices will be created. The trial values of the revamped STI and
the series of FTSE ST Indices were made available on the FTSE website beginning
October to facilitate technical testing .

Background of the study

It has been asserted that links between the global stock markets has increase with the
improved electronic communication and abolition of exchange control over the prices.
The spread of information just take seconds so the effect of the news can be seen to the
all markets at the same time.
As now days we all talk about globalisation and global economy and say that all the
economy are interdependent and a change in one will effect the change in the other economy.
So dose the same impact is there for the Global stock indices also a fall in one will result to
the similar fall in the other.

Purpose of the study


The purpose of the study is to show that is there any relationship exist between the global
indices, on the basis we can predict the Indian index by developing the regression model
based of the past data of Indices. It is also done to estimate that dose really there any
correlation exist between Indian stock index and the other global indices. The fall of one
or the bear face in any index will have same effect. Whether the Bull Run or bear run
coexist at the same time at all the market.

™ Statement of the problem:


There are various views with respect to the interlinking & operation of the stock market
indices many investors believes that the Indian market has a significant correlation with

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the other indices and if those indices has done well then on the same day Indian market
will also react in the same manner and vice versa. Some investors are of the view that
Indian index is independent of other stock indices and will paly on its own and u cant
say that if some markets have done well some day then Indian market will also react in
the same manner.

™ Objective of study:

¾ To find out the correlation among the Sensex with other indices at
different point of time.
¾ To analyse the relationship between Sensex and Global indices with
the help of regression equation developed.
¾ To find out whether the excepted values calculated on the basis of
regression equation is related to them or not.

™ Scope of the study:

The scope of the study is limited to Indian Stock Indices with the other Global indices
under which total of seven indices historical figures have been taken for my study. And
the analysis is based on the last 4 year data.

™ Significance of the study:

The Purpose of the study is to show that Sensex is related to Hang seng, KOSPI, NIKKE,
Dow Jones industrial Average, NASDAQ. Straits Time Index has relationship with share
prices and this relationship is significant. This shows that value addition by the company
is also a dependant factor for the movement in the share prices.

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Theoretical framework

When people refer to "the stock market" or "the market" it can sometimes be confusing to
beginning investors as to what those terms actually mean. Are they talking about all the
stocks that trade on the NYSE, all the stocks that trade in the U.S., or all the stocks in the
world? Typically when people refer to "the market" they are talking about all the publicly
traded stocks in this country they will usually say "the global market" if they mean the
entire world. Indeed, the concept of "the market" can be a difficult one at first, especially
since beginners tend to think of stocks as individual units. This section explains some
different ways that investing experts think about the market as a whole.

Efficient Market

Proponents of the efficient market theory believe that there is perfect information in the
stock market. This means that whatever information is available about a stock to one
investor is available to all investors (except, of course, insiders, but insider trading is
illegal). Since everyone has the same information about a stock, the price of a stock
should reflect the knowledge and expectations of all investors. The bottom line is that you
should not be able to "beat the market" since there is no way for you to know something
about a stock that isn't already reflected in the stock's price. That's not to say that efficient
market theory fans claim that all stocks are necessarily priced correctly; instead, they
claim that there is no way for you to know whether or not prices are too high or too low.
Proponents of this theory spend little time trying to pick stocks that are going to be

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"winners"; instead, they simply try to match the market's performance. However, there is
ample evidence to dispute the basic claims of this theory, and most investors don't believe
it.

Random Walk

The random walk theory draws conclusions that are similar to the efficient market theory,
but it uses a different line of reasoning. The theory takes its name from a well-known
book by Burton Malkiel (although others pioneered the idea decades earlier) which says
that future stock prices are completely independent of past stock prices. In other words,
the path that a stock's price follows is a "random walk" that cannot be determined from
historical price information, especially in the short term. Much like efficient market
theory fans, the random walkers believe that it is impossible to pick "winning" stocks and
that you’re best bet is just to try to match the market's performance, usually by using a
long-term buy and hold strategy.

Behavioral Finance

Behavioral finance theory is very different from the random walk and the efficient market
theories. Proponents of behavioral finance believe that there are important psychological
and behavioral variables involved in investing in the stock market that provide
opportunities for smart investors to profit. For example, when a certain stock or sector
becomes "hot" and prices increase substantially without a change in the company's
fundamentals, behavioral finance theorists would attribute this to mass psychology (also
known as the "follow the herd instinct"). They therefore might short the stock in the long
term, knowing that eventually the psychological bubble will burst and they will profit.

Bull and Bear Markets

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In addition to the three market theories mentioned above, there are other ways of thinking
about the market as a whole, that are less theoretical and more grounded in what is
actually happening to them. One way is to describe the overall trends in the market, such
as by defining them as bearish or bullish. A bull market, loosely defined, is a market in
which the major stock indexes have risen by over 20% over a substantial period of time,
usually measured in months or years. Bull markets can happen as a result of an economic
recovery, an economic boom, or simple investor psychology. The longest and most
famous of all bull markets is the one that began in the early 1990s in which the U.S.
equity markets grew at their fastest pace ever.
Bear markets are the exact opposite of bull markets: they are markets in which the major
indexes have declined by 20% or more over a period of at least two months (a decline
that large for any shorter time period is simply called a "correction", especially if it
followed a substantial rise). Bear markets usually occur when the economy is in a
recession and unemployment is high, or when inflation is rising quickly. The most
famous bear market in U.S. history was, of course, the Great Depression of the 1930s.

Seasonal and Time-Related Market Factors

During certain times of the year or certain times of the month, the markets tend to exhibit
certain behaviors more often than would be predicted by chance. For example, the early
fall, October in particular, has historically been a time when the markets have slumped,
although the effect isn't extremely pronounced and there isn't a logical explanation for it.
Strong stock performance in January is another example of a seasonal market trend. The
so-called "January Effect" occurs because many investors choose to sell some of their
stock right before the end of the year in order to claim a capital loss for tax purposes.
Once the tax calendar rolls over to a new year on January 1st these same investors
quickly reinvest their money in the market, causing stock prices to rise. But although the
January effect has been observed numerous times throughout history, it is difficult for
investors to profit from it since the market as a whole expects it to happen and therefore
adjusts its prices accordingly.

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Chapter-2

LITERATURE REVIEW

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™ Review of literature:

Abstract

This article explores the fundamental factors that affect cross-country stock return
correlations. Using transactions data from 1988 to 1992, we construct overnight and
intraday returns for a portfolio of Japanese stocks using their NYSE-traded American
Depository Receipts (ADRs) and a matched-sample portfolio of U.S. stocks. We find that
U.S. macroeconomic announcements, shocks to the Yen/Dollar foreign exchange rate and
Treasury bill returns, and industry effects have no measurable influence on U.S. and
Japanese return correlations. However, large shocks to broad-based market indices
(Nikkei Stock Average and Standard and Poor's 500 Stock Index) positively impact both
the magnitude and persistence of the return correlations.

Purpose:

Why Do Markets Move Together? An Investigation of U.S.-Japan Stock Return


Comovements. By G. Andrew Karolyi and René M. Stulz

Methodology

The data consists of all japanines ADR trade at New York stock exchange. Intraday stock
and ADR prices are taken from ISSM from 31st May1988 to 29 may 1992. They used
900 quotes for each firm. They have considered the lag between the bot stock exchange
and the day and the overnight returns are considered. They used the regression and
covariance & multivariate grach model to calculate the relationship among the both the
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markets on the basis of the similar stock traded in the market and the effect of news and
information on the stocks.

Conclusion

G. Andrew Karolyi and René M. Stulz find that U.S. macroeconomic announcements,
shocks to the Yen/Dollar foreign exchange rate and Treasury bill returns, and industry
effects have no measurable influence on U.S. and Japanese return correlations. However,
large shocks to broad-based market indices (Nikkei Stock Average and Standard and
Poor's 500 Stock Index) positively impact both the magnitude and persistence of the
return correlations.

Abstract

The empirical objective of this study is to account for the time-variation in the
covariance’s between stock markets, and to assess the extent of capital market
integration. Using data on sixteen national stock markets, we estimate a multivariate
factor model in which the volatility of returns is induced by changing volatility in the
factors. Unanticipated returns are assumed to depend both on innovations in "observable"
economic variables and on "unobservable" factors. The risk premium on an asset is a
linear combination of the risk premia associated with factors.

Purpose:

Volatility and Links between National Stock Markets by Mervyn King, Enrique Sentana
and Sushil Wadhwani

Methodology

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They used the conditional correlation coefficients between the markets and greach model
and two asset tow factor model to show the relationship.

Conclusion

They found that idiosyncratic risk is significantly priced, and that the "price of risk" is not
common across countries. This either can be interpreted as evidence against the null of
integrated capital markets or could reflect the failure of some other maintained
assumptions. Another empirical finding is that only a small proportion of the covariances
between national stock markets and their time-variation can be accounted for by
"observable" economic variables. Changes in correlations between markets are driven
primarily by movements in "unobservable" variables.

™ Benefits derived from literature review:

Provide a context for the research


Justify the research
Ensure the research hasn't been done before
Show where the research fits into the existing body of knowledge
Enable the researcher to learn from previous theory on the subject
Illustrate how the subject has been studied previously
Highlight flaws in previous research
Outline gaps in previous research
Show that the work is adding to the understanding and knowledge of the field
Help refine, refocus or even change the topic

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Chapter-3

METHODOLOGY

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Methodology
™ Study type

The study type is analytical, quantitative and historical.


Analytical as facts and existing information is used for the analysis.
Quantitative as regression equation is calculated and the variables are expressed in
measurable terms.
Historical as the historical information is used for analysis and interpretation.

Data Profile

Data includes Eight Indices form the population of all the world market indices (for
which relevant data was available), for a period of 4 years starting from year 2005 to
2008 0n the daily basis.
The following is the list of the seven indices:-
1. Sensex
2. KOSPI
3. NIKKIE 225
4. NASDAQ
5. Dow Jones Industrial Avg.
6. Strait time index
7. DJ Stoxx 5o
8. Hang Seng.

™ Data gathering procedure and instrumentation

Data type: Secondary data

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Data:
¾ Historical Daily closing and opening values of the stock indices
Sensex, KOSPI, Nikkei225, NASDAQ, Dow Jones Ind. Avg., etc.

Data Source:
Historical opening and closing values of the sample index for the period stated above on
the daily basis from Yahoo Finance & the particular Stock indices sites.

Hypothesis:

Hypothesis 1( Sensex & Nikkei 225)

H0: There is no significant difference between Sensex and Nikkei225.


H1: There is significant difference between Sensex and Nikkei225

Hypothesis 2 (Sensex & KOSPI)

H0: There is no significant difference between Sensex & KOSPI.


H1: There is significant difference between Sensex & KOSPI.

Hypothesis 3 (Sensex & Straits Time index)

H0: There is no significant difference between Sensex & Straits Time indexes.
H1: There is significant difference between Sensex & Straits Times index

Hypothesis 4 (Sensex & Hang Seng)

H0: There no significant difference between Sensex & Hang Seng.


H1: There is significant difference between Sensex & Hang Seng.

Hypothesis 5 (Sensex & NASDAQ)

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H0: There is no significant difference between Sensex & NASDAQ.
H1: There is significant difference between Sensex & NASDAQ.

Hypothesis 6 (Sensex & Dow Jones Industrial index)

H0: There is no significant difference between Sensex & Dow Jones Industrial index.
H1: There is significant difference between Sensex & Dow Jones Industrial index

Hypothesis 7 (Sensex & DJ Stoxx 50)

H0: There is no significant difference between Sensex and DJ Stoxx 50.


H1: There is significant difference between Sensex and DJ Stoxx 50

™ Testing of Hypothesis

The hypothesis is tested using Regression & Student t test.


Regression is the process of predicting one variable from another by statistical means
using previous data.
Student t-test is used for test the hypothesis and to find out the how significantly the
calculated data mean and the mean of actual data are related to each other.
If the t-cal < t-tab, then the null hypothesis is accepted.
The hypothesis is tested using regression tool and student t-test.
Regression is a statistical process by which several independent variables are used to
predict one dependant variable.

Description about the analysis tools used


• Correlation
• Regression
• Student t – test

Correlation
A statistical concept that shows the tendency of two or more variables to change their
values at the same time, either in the same direction i.e. positive correlation or opposite

43 | P a g e
directions i.e. negative correlation. In general statistical usage, correlation or co-relation
refers to the departure of two variables from independence. In this broad sense there are
several coefficients, measuring the degree of correlation, adapted to the nature of data.

A number of different coefficients are used for different situations. The best known is the
Pearson product-moment correlation coefficient, which is obtained by dividing the
covariance of the two variables by the product of their standard deviations. Despite its
name, it was first introduced by Francis Galton

Pearson product-moment correlation coefficient

The correlation coefficient ρX, Y between two random variables X and Y as:

The correlation is defined only if both of the standard deviations are finite
and both of them are nonzero. It is a corollary of the Cauchy-Schwarz
inequality that the correlation cannot exceed 1 in absolute value.

Regression
Motivation for the form of the coefficient of correlation

Another motivation for correlation comes from inspecting the method of simple linear
regression. As above, X is the vector of independent variables, xi, and Y of the dependent
variables, yi, and a simple linear relationship between X and Y is sought, through a least-
squares method on the estimate of Y:

Then, the equation of the least-squares line can be derived to be of the form:

44 | P a g e
Where r has the familiar form mentioned

above:

Interpretation of the size of a correlation

Several authors have offered guidelines for the interpretation of a correlation coefficient.
Cohen (1988), For example, a correlation of 1.0 or −1.0 indicates that the two variables
analyzed are equivalent modulo scaling. Scientifically, this more frequently indicates a
trivial result than an earth-shattering one. For example, consider discovering a correlation
of 1.0 between how many feet tall a group of people are and the number of inches from
the bottom of their feet to the top of their heads.

Correlation Negative Positive

Small −0.3 to −0.1 0.1 to 0.3

Medium −0.5 to −0.3 0.3 to 0.5

Large −1.0 to −0.5 0.5 to 1.0

PAIRED T- TEST
A t-test is any statistical hypothesis test in which the test statistic has a Student's t distribution
if the null hypothesis is true. It is applied when sample sizes are small enough that using an
assumption of normality. This function gives a paired Student t test, confidence intervals for
the difference between a pair of means and, optionally, limits of agreement for a pair of
samples.

The paired t test provides a hypothesis test of the difference between population means for a
pair of random samples whose differences are approximately normally distributed. Please
note that a pair of samples, each of which are not from normal a distribution, often yields
differences that are normally distributed.

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The test statistic is calculated as:

Where d bar is the mean difference, s² is the sample variance, n is the sample size and t is
a Student t quintile with n-1 degrees of freedom

Power is calculated as the power achieved with the given sample size and variance for
detecting the observed mean difference with a two-sided type I error probability of (100-
CI%)%.

LIMITS OF AGREEMENT

If the main purpose in studying a pair of samples is to see how closely the samples agree,
rather than looking for evidence of difference, then limits of agreement are useful. Stats
Direct displays these limits with an agreement plot if you check the agreement box before
a paired t test runs. For more detailed analysis of this type.

Procedure

Correlation

Correlation is used to find the relationship between Indian Stock Index i.e. Sensex based
on the stocks registered in Bombay Stock index with the other Global recognised and
well known indices. So that we can find out how closely they are related to each other
and does they react in the same manner and show the same trend. For doing the
correlation between the different stocks we have to consider the time lag between the

46 | P a g e
different markets and have to do the correlation study accordingly for eg. There is one
day lag between Indian stock Indices and US & European indices. All such factors are
considered while doing the study

Regression

The regression equations were formed on the basis of the data of sensex and other global
indices on one by one. For this purpose the daily data from 2005-2007 is taken into
consideration. The daily returns on the indices were calculated and the regression
equations were formed by comparing the returns of sensex and other global index. Now
to check whether with the help of the such equation can we predict the Sensex an with
the data available of the other markets due to time lag between them. So we can develop
a model that shows that there is a significant relationship between the two markets.

Student T- test

Student T- test is used to find out whether there is a significant relationship between the
data calculate through the use of the regression equation and actual market data on the
test data of the starting months of year 2008 .

™ Limitations of the study


¾ The Study is based on the return pattern of the stocks other visible and invisible
factors are not taken into consideration.
¾ Time lag between the markets so the spread of information does not have same
impacts

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Chapter-4

ANALYSIS AND
INTREPRETATION

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Interpretation:- The above graph clearly shows that there is a high level of correlation
exist between Sensex and Nikkei 225 in the year 2008 the data considered over here are
having a high correlation or can say that they have a tendency of moving together. In the
rest years the correlation is moderate.

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Interpretation:- The above graph clearly shows that there is a high level of correlation
exist between Sensex and Hang Seng in the year 2008 the data considered over here are
having a high correlation or can say that they have a tendency of moving together. In the
rest years i.e. 2007, 2006, 2005 the correlation is moderate.

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Interpretation:- The above graph clearly shows that there is a high level of correlation
exist between Sensex and Straits Times Index in the year 2008 the data considered over
here are having a high correlation said to the daily movements but on the basis of 6 days
moving average it is .69 ( aprox.) which has decreased and futher the 10 days moving
average has been decreased to .41 ( aprox.) which means on the lager basis the market are
not so high correlated or can say that they have a tendency of moving together. In the rest
years i.e. 2007, 2006, 2005 the correlation is moderate.

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Interpretation: - The above graph clearly shows that there is a high level of correlation
exist between Sensex and NASDAQ in the year 2008 the data considered over here is low
correlated with each other on the daily basis but the correlation increases as we consider
the data of moving averages for the purpose of correlation so we can say that the market
have the tendency to move together in the total return format. Same is for the rest years
i.e. 2007, 2006, 2005 the correlation is moderate.

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Interpretation: - The above graph clearly shows that there is a high level of correlation
exist between Sensex and Dow Jones Industrial Average Index in the year 2008 the data
considered over here is low correlated with each other on the daily basis but the
correlation increases as we consider the data of moving averages for the purpose of
correlation so we can say that the market have the tendency to move together in the total
return format. Same is for the rest years i.e. 2007, 2006, 2005 the correlation is moderate.

53 | P a g e
Interpretation: - The above graph clearly shows that there is a moderate level of
correlation exist on the daily returns between Sensex and KOSPI in the year 2008 the
data considered over here are having a high correlation on the basis of 10 days moving
average it is .816 ( aprox.) and further the 6 days moving average has been decreased to
.567 ( aprox.) which means on the lager basis the market are not so high correlated or can
say that they have a tendency of moving together. In the rest years i.e. 2007, 2006, 2005
the correlation is moderate and shown the same trend.

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Interpretation: - The above graph clearly shows that there is a moderate level of
correlation exist on the daily returns between Sensex and D J Stoxx 50 in the year 2008
the data considered over here are having a high correlation on the basis of 6 days moving
average it is .867 (aprox.) and further the 10 days moving average has been increased to
.897 ( aprox.) which means on the lager basis the market highly correlated or can say that
they have a tendency of moving together. In the rest years i.e. 2007, 2006, 2005 the
correlation is among the data table is low on the daily basis but increases as we move on
the broader extend of the comparison i.e. 6 & 10 days moving average.

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Intrepretation on the basis of Student –t-test

Interpretion on the basis of data calculated by regession equation


For checking that is sensex can be be predicted on the basis of
other world market indices movements

For Sensex and Nikkei 225


t-Test: Paired Two Sample for Means

Variable
1 Variable 2
Mean 0.344505 0.383393639
Variance 3.105539 1.180656354
Observations 27 27
Pearson Correlation 0.49796
Hypothesized Mean
Difference 0
Df 26
t Stat 0.131
P(T<=t) one-tail 0.44839
t Critical one-tail 1.705618
P(T<=t) two-tail 0.89678
t Critical two-tail 2.055529

Hypothesis ( Sensex & Nikkei 225)

H0: There is no significant difference between Sensex and Nikkei225.


H1: There is significant difference between Sensex and Nikkei225

Regression equation used :- X – X’ = bxy(Y – Y’)


X- 0.168566 = 0.574797*(N5-(-0.046831))

Hence the data calulate by the above eq. compared with the actual
data with the help of t- test shows that there is no sigficant difference
between the calculated data and the actual data so the Null hypothises
is accepted. The calculate t- value is less then the tabulated t – value
@5% significance level
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For Sensex and Hang Seng
t-Test: Paired Two Sample for Means

Variable Variable
1 2
Mean 0.095103 0.221321
Variance 4.324833 2.100137
Observations 30 30
Pearson Correlation 0.712078
Hypothesized Mean
Difference 0
Df 29
t Stat 0.47336
P(T<=t) one-tail 0.319749
t Critical one-tail 1.699127
P(T<=t) two-tail 0.639497
t Critical two-tail 2.04523

Hypothesis (Sensex & Hang Seng)

H0: There no significant difference between Sensex & Hang Seng.


H1: There is significant difference between Sensex & Hang Seng.

Regression equation used :- X – X’ = bxy(Y – Y’)


X - 0.169749 = 0.63391*(Y-(-0.138038))

Hence the data calulate by the above eq. compared with the actual
data with the help of t- test shows that there is no sigficant difference
between the calculated data and the actual data so the Null hypothises
is accepted. The calculate t- value is less then the tabulated t – value
@5% significance level

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For Sensex and Straits Times Index
t-Test: Paired Two Sample for Means
Variable
Variable 1 2
Mean -0.18729375 -0.26132
Variance 11.0722969 3.887569
Observations 24 24
Pearson Correlation 0.814425919
Hypothesized Mean
Difference 0
Df 23
t Stat 0.175427491
P(T<=t) one-tail 0.431139511
t Critical one-tail 1.713871517
P(T<=t) two-tail 0.862279022
t Critical two-tail 2.068657599

Hypothesis (Sensex & Straits Time index)

H0: There is no significant difference between Sensex & Straits Time indexes.
H1: There is significant difference between Sensex & Straits Times index

Regression equation used :- X – X’ = bxy(Y – Y’)

X - 0.162697 = 0.744946*(M6-0.076191)

Hence the data calulate by the above eq. compared with the actual
data with the help of t- test shows that there is no sigficant difference
between the calculated data and the actual data so the Null hypothises
is accepted. The calculate t- value is less then the tabulated t – value
@5% significance level

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For Sensex and NASDAQ
t-Test: Paired Two Sample for Means

Variable Variable
1 2
Mean -0.57517 0.085532
Variance 4.266534 0.171279
Observations 30 30
Pearson Correlation 0.368523
Hypothesized Mean
Difference 0
Df 29
t Stat 1.854512
P(T<=t) one-tail 0.03693
t Critical one-tail 1.699127
P(T<=t) two-tail 0.07386
t Critical two-tail 2.04523

Hypothesis (Sensex & NASDAQ)

H0: There is no significant difference between Sensex & NASDAQ.


H1: There is significant difference between Sensex & NASDAQ.

Regression equation used :- X – X’ = bxy(Y – Y’)


X - 0.169302 = 0.273237 * ( Y-0.039848 )

Hence the data calulate by the above eq. compared with the actual
data with the help of t- test shows that there is no sigficant difference
between the calculated data and the actual data so the Null hypothises
is accepted. The calculate t- value is less then the tabulated t – value
@5% significance level.

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For Sensex and Dow Jones
t-Test: Paired Two Sample for Means

Variable Variable
1 2
Mean -0.57517 0.086203
Variance 4.266534 0.155253
Observations 30 30
Pearson Correlation 0.368523
Hypothesized Mean
Difference 0
Df 29
t Stat 1.85295
P(T<=t) one-tail 0.037045
t Critical one-tail 1.699127
P(T<=t) two-tail 0.074091
t Critical two-tail 2.04523

Hypothesis (Sensex & NASDAQ)

H0: There is no significant difference between Sensex & Dow Jones Ind. Avg.
H1: There is significant difference between Sensex & Dow Jones Ind. Avg..

Regression equation used :- X – X’ = bxy(Y – Y’)

X-0.163975 = 0.26014 ( Y - 0.032226 )

Hence the data calulate by the above eq. compared with the actual
data with the help of t- test shows that there is no sigficant difference
between the calculated data and the actual data so the Null hypothises
is accepted. The calculate t- value is less then the tabulated t – value
@5% significance level.

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For Sensex and KOSPI
t-Test: Paired Two Sample for Means

Variable Variable
1 2
Mean -0.30436 -0.02205
Variance 3.388736 0.716636
Observations 28 28
Pearson Correlation 0.327948
Hypothesized Mean
Difference 0
Df 27
t Stat 0.85075
P(T<=t) one-tail 0.201195
t Critical one-tail 1.703288
P(T<=t) two-tail 0.40239
t Critical two-tail 2.05183

Hypothesis (Sensex & KOSPI)

H0: There is no significant difference between Sensex & KOSPI.


H1: There is significant difference between Sensex & KOSPI.

Regression equation used :- X – X’ = bxy(Y – Y’)


X - 0.164883 = 0.551606 * ( Y- 0.112395 )

Hence the data calulate by the above eq. compared with the actual
data with the help of t- test shows that there is no sigficant difference
between the calculated data and the actual data so the Null hypothises
is accepted. The calculate t- value is less then the tabulated t – value
@5% significance level

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For Sensex and D J Stoxx50
t-Test: Paired Two Sample for Means

Variable Variable
1 2
Mean -0.19856 -0.05043
Variance 4.707664 2.144453
Observations 29 29
Pearson Correlation 0.648639
Hypothesized Mean
Difference 0
Df 28
t Stat 0.48278
P(T<=t) one-tail 0.316504
t Critical one-tail 1.701131
P(T<=t) two-tail 0.633008
t Critical two-tail 2.048407

Hypothesis (Sensex & DJ Stoxx 50)

H0: There is no significant difference between Sensex and DJ Stoxx 50.


H1: There is significant difference between Sensex and DJ Stoxx 50

Regression equation used :- X – X’ = bxy(Y – Y’)


X - 0.160477 = 0.676423 * ( Y - 0.041085 )

Hence the data calulate by the above eq. compared with the actual
data with the help of t- test shows that there is no sigficant difference
between the calculated data and the actual data so the Null hypothises
is accepted. The calculate t- value is less then the tabulated t – value
@5% significance level

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FINDING

¾ Nearly all the stock markets have the interdependence on each other with
the growth of electronic communication and computerization of the stock
exchanges.
¾ From the above we can also conclude that the Sensex behaves more
closely to the Asian markets as compared to other world markets and we
can predict the share indices on the basis of movements in the Asian
markets to the extent.

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Chapter-5

CONCLUSION

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CONCLUSION

It has been asserted that links between the global stock markets has increased with the
improved electronic communication and abolition of exchange control over the prices.
The spread of information just takes seconds, so the effect of the news can be seen on all
the markets at the same time. As we can see that the help of correlation which is getting
stronger and stronger in most of the cases on year on year basis among the Sensex and
other global markets like KOSPI, Nikkei, HangSeng etc.

.
And even the t- test result also shows that there is a significant relationship between the
data calculated and the actual data what the market has show @ 5% significance level. By
all this we can hence conclude that there is a significant relationship among the
movement in the Sensex with the movements of other markets.

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BIBLIOGRAPHY

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Bibliography

Websites:
• www.yahoofinance.com
• www.bseindia.com
• www.capitaline.com
• www.moneycontrol.com
• www.JSTOR.COM

BOOKS:
• Fundamentals of Statistics By: - S C Gupta

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