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Developing and analyzing an econometric model Business Statistics Satrajit Chakraborty PGP-1 Sec-2 Roll No -

Developing and analyzing an econometric model

Developing and analyzing an econometric model Business Statistics Satrajit Chakraborty PGP-1 Sec-2 Roll No - 2008247

Business Statistics

Developing and analyzing an econometric model Business Statistics Satrajit Chakraborty PGP-1 Sec-2 Roll No - 2008247

Satrajit Chakraborty PGP-1 Sec-2 Roll No - 2008247

Developing and analyzing an econometric model Business Statistics Satrajit Chakraborty PGP-1 Sec-2 Roll No - 2008247

Analysis of share prices based on macroeconomic factors using Classical Linear Regression Model (CLRM) For the purpose of the study, the general macroeconomic theory has been used, which tries to find out the effect of inflation and foreign portfolio investments (FII) on company’s performance and how these two factors, coupled with market and sector-specific factors affect the share price of a company. Here, share prices of 5 banking stocks have been selected for analysis from April 2003 to March 2008 and the CLRM has been used, which tries to fit a linear least square regression estimate between the dependant and independent variable. The results are then analyzed using EViews. The independent variables are:

a) Index values of the BSE BANKEX INDEX over the time period. The base date for BANKEX is 1st January 2002. The base value for BANKEX is 1000 points. BSE has calculated the historical index values of BANKEX since 1st January 2002.

b) Inflation rate based on Wholesale Price Index (WPI) of all commodities. WPI Base Year 1993-94 = 100.

c) Cash Reserve Ratio, a statutory regulation set by RBI on Indian banks regarding minimum reserves each bank must hold to customer deposits and notes to satisfy withdrawal demands.

d) Net FII investments in Indian equity market over the time period to see how major FII

contributions towards share price fluctuations in India are. The variables in the model are selected based on the relevance and importance of regulatory and market factors which might affect share prices in banking sector in the long run. The result is then analyzed using Econometric software package to see how much each factor in this model actually influences the share price of each of the companies and what are the limitations of this model and the data used. The 5 companies taken are STATE BANK OF INDIA (SBI), ICICI

BANK (ICICI), HDFC BANK (HDFC), AXIS BANK (AXIS) and PUNJAB NATIONAL BANK (PNB).

2

Data used for the analysis

           

BANKE

     

DATE

SBI

ICICI

HDFC

AXIS

PNB

X

WPI

CRR

FII

Apr-03

278.55

121.40

246.35

44.35

118.20

1392.79

173.10

4.75

430.30

May-

352.30

137.65

245.05

52.25

179.40

1656.36

173.40

4.75

1220.80

03

Jun-03

384.20

150.20

258.95

48.70

155.10

1731.61

173.50

4.75

2581.70

Jul-03

421.85

158.60

266.55

80.15

169.65

1872.26

173.40

4.50

2346.50

Aug-03

439.25

179.50

275.45

73.30

171.90

2020.88

173.70

4.50

2091.30

Sep-03

451.60

204.35

275.15

71.20

186.55

2137.87

175.60

4.50

3851.30

Oct-03

484.20

248.10

316.35

74.75

202.80

2444.47

176.10

4.50

6797.50

Nov-03

470.75

249.90

302.45

83.75

184.70

2379.06

176.90

4.50

3300.50

Dec-03

538.50

295.70

366.65

135.15

241.35

2799.04

176.80

4.50

6161.10

Jan-04

595.80

295.25

344.70

160.35

257.30

2828.55

178.70

4.50

3176.80

Feb-04

585.30

271.80

374.55

140.50

242.95

2805.67

179.80

4.50

2397.50

Mar-04

605.70

295.90

378.35

146.75

333.90

2992.90

179.80

4.50

5604.40

Apr-04

642.60

315.20

375.90

155.15

375.10

3188.07

180.90

4.50

7638.20

May-

465.00

230.35

352.55

107.60

261.45

2382.42

182.10

4.50

-

04

3246.90

Jun-04

430.65

244.40

369.70

129.60

281.95

2431.33

185.20

4.50

516.40

Jul-04

441.95

266.80

374.80

127.60

267.45

2539.53

186.60

4.50

913.60

Aug-04

442.85

269.45

367.40

119.05

265.10

2536.41

188.40

4.50

2892.30

Sep-04

468.20

286.05

402.85

129.95

259.45

2719.17

189.40

4.50

2385.60

Oct-04

447.35

299.00

414.35

152.50

245.05

2736.61

188.90

5.00

3263.30

Nov-04

529.70

340.20

495.30

166.50

348.50

3263.40

190.20

5.00

6740.80

Dec-04

652.45

370.75

518.85

185.20

405.20

3721.97

188.80

5.00

6683.80

Jan-05

642.80

360.60

564.40

206.20

408.25

3670.63

188.60

5.00

457.10

Feb-05

714.40

380.75

586.90

241.05

457.90

3916.46

188.80

5.00

8369.00

Mar-05

656.95

393.00

544.25

242.05

393.30

3847.96

189.40

5.00

7502.20

Apr-05

584.80

360.20

537.20

230.10

346.20

3504.33

191.60

5.00

-654.10

May-

670.70

392.05

540.05

239.80

381.70

3803.40

192.10

5.00

-

05

1140.10

Jun-05

681.55

421.55

634.10

247.15

379.90

4014.42

193.20

5.00

5328.60

Jul-05

800.80

536.00

685.50

259.90

424.65

4764.91

194.60

5.00

7934.10

Aug-05

796.65

481.70

640.15

250.00

401.15

4468.51

195.30

5.00

5051.20

Sep-05

938.60

600.35

687.55

265.50

450.55

5125.01

197.20

5.00

4646.80

                 

-

Oct-05

838.25

497.70

606.00

238.30

404.95

4425.36

197.80

5.00

3693.90

Nov-05

896.25

537.15

687.55

271.40

436.10

4789.72

198.20

5.00

4038.70

Dec-05

907.45

584.70

707.45

286.35

466.35

5081.71

197.20

5.00

9335.00

3

Jan-06

886.80

609.15

762.55

337.15

465.55

5254.89

196.30

5.00

3677.60

Feb-06

877.20

615.10

736.05

328.35

441.30

5204.69

196.40

5.00

7204.00

Mar-06

968.05

589.25

773.50

356.35

471.20

5265.24

196.80

5.00

6688.80

Apr-06

913.65

590.25

826.60

347.05

433.05

5245.79

199.00

5.00

521.90

May-

831.00

536.05

740.20

285.80

405.40

4769.87

201.30

5.00

-

06

7354.20

Jun-06

727.40

487.40

791.15

266.75

325.55

4348.79

203.10

5.00

479.50

Jul-06

810.05

554.05

795.05

297.85

380.20

4781.14

204.00

5.00

1145.20

Aug-06

930.00

596.50

853.15

342.90

469.75

5308.01

205.30

5.00

4643.10

 

1028.3

               

Sep-06

0

699.05

926.00

379.20

526.20

6038.87

207.80

5.00

5424.70

Oct-06

1095.5

776.85

1004.0

433.75

518.45

6484.06

208.70

5.00

8013.10

0

5

 

1314.0

 

1118.4

           

Nov-06

0

871.45

0

474.05

544.75

7179.71

209.10

5.00

9380.10

Dec-06

1245.9

890.40

1069.7

469.05

506.95

7085.73

208.40

5.00

-

0

5

3667.40

 

1138.0

 

1078.1

           

Jan-07

5

940.50

5

534.00

508.15

7260.09

208.80

5.50

492.10

 

1039.1

               

Feb-07

5

831.90

932.60

460.00

424.25

6408.01

208.90

5.50

7655.30

                 

-

Mar-07

992.90

853.10

949.40

490.15

471.65

6542.01

209.80

6.00

1082.00

 

1105.2

 

1026.1

           

Apr-07

5

865.90

5

467.85

503.40

6882.89

211.50

6.00

6679.20

May-

1352.4

918.90

1139.7

579.55

536.35

7607.35

212.30

6.50

3959.70

07

0

5

Jun-07

1525.3

955.30

1144.1

605.00

539.80

8009.94

212.30

6.50

1643.10

0

0

Jul-07

1624.5

927.05

1198.6

626.70

514.75

8148.68

213.60

6.50

23872.4

0

5

0

Aug-07

1599.5

884.65

1171.3

634.10

484.30

7858.79

213.80

7.00

-

0

0

7770.50

Sep-07

1950.7

1063.1

1439.0

764.40

542.70

9469.26

215.10

7.00

16132.6

0

5

5

0

Oct-07

2068.1

1257.0

1653.1

918.80

525.70

10655.33

215.20

7.00

20590.9

5

0

0

0

Nov-07

2300.3

1184.6

1719.0

931.25

601.85

10870.88

215.90

7.50

-

0

5

0

5849.90

 

2371.0

1232.4

1727.8

           

Dec-07

0

0

0

967.10

664.35

11418.00

216.40

7.50

5579.10

 

2162.2

1145.6

1568.0

1110.8

         

Jan-08

5

5

0

0

648.60

10713.91

218.10

7.50

-611.40

Feb-08

2109.7

1090.9

1453.4

1018.7

604.15

10113.73

219.90

7.50

2262.60

0

5

5

5

 

1598.8

 

1319.9

           

Mar-08

5

770.10

5

781.15

508.15

7717.61

225.50

7.50

-130.40

4

The share prices taken are the monthly closing price of the company and the BANKEX. The WPI values are also monthly closing data. The FII values are the net FII in Equity market only for the months specified. The CRR values are percentage of statutory bank deposits with RBI.

For all the values, log transformations have been taken, except the CRR value which is in percentage. This was done as the Sum Squared Residual value was coming abnormally high, by taking ordinary values, because of variations in the base of each variable.

Results and Analysis Methodology and Assumptions

1) Used White’s heteroskedasticity consistent standard error estimates. The effect of using White’s correction is that in general the standard errors for the slope coefficients are increased relative to the usual OLS standard errors. This makes us more “conservative” in hypothesis testing, so that we would need more evidence against the null hypothesis before we would reject it and the estimates are close to Best Linear Unbiased Estimate

2)

3) The normality of the data has been tested, as the CLRM is most useful for data with

90% confidence level is taken for analysis purpose.

normal distribution. The results are analyzed after estimating the regression equation.

4)

5) Discrepancies, if any, are noted and causes for the same are analyzed (like heteroskedasticity, autocorrelation etc).

6)

Finally the overall comparative analysis for each company is done

5

Histogram-Normality Test

Analysis for SBI

12 10 8 6 4 2 0 -0.10 -0.05 -0.00 0.05 0.10
12
10
8
6
4
2
0
-0.10
-0.05
-0.00
0.05
0.10

Series: Residuals Sample 2003M05 2007M10 Observations 39

Mean

1.03e-17

Median

-0.001633

Maximum

0.096412

Minimum

-0.098298

Std. Dev.

0.046059

Skewness

0.195208

Kurtosis

2.537333

Jarque-Bera

0.595540

Probability

0.742472

Since the Skewness is almost zero and Kurtosis is less than 3, the data is normal.

Dependent Variable: DLOG(SBI) Method: Least Squares

Date: 02/03/09

Sample (adjusted): 2003M05 2007M10 Included observations: 39 after adjustments White Heteroskedasticity-Consistent Standard Errors & Covariance

Time: 11:47

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C

-0.083331

0.092132

-0.904477

0.3721

DLOG(BANKEX)

0.975892

0.105067

9.288257

0.0000

DLOG(FII)

0.004483

0.005199

0.862299

0.3946

DLOG(WPI)

0.349935

1.947027

0.179728

0.8584

CRR

0.017782

0.018411

0.965834

0.3409

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

0.688807

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

0.065167

0.652196

0.082533

0.048674

-3.088136

0.080551

-2.874858

65.21864

18.81421

1.677151

0.000000

From this result, the conclusions are

a) There is significant relationship between the share price of SBI and the BANKEX index. There seem to be no significant relationship between the dependant variable and FII, WPI, CRR.

b) Around 65% variations in dependant variable are explained by variations in independent variables.

c) The model is sound in explaining the overall significance of the independent variables on the dependant variable as Prob (F-Statistic) is zero.

d) The Durbin-Watson test statistic is around 1.68, which shows that there is no significant positive serial correlation in the model.

e) The linear regression equation is DLOG(SBI) = -0.083 + 0.976DLOG(BANKEX) + 0.004DLOG(FII) + 0.349DLOG(WPI) + 0.017CRR

Histogram-Normality Test

Analysis for ICICI

6 5 Series: Residuals Sample 2003M05 2007M10 Observations 39 4 Mean 9.96e-18 Median 0.004317 Maximum
6
5
Series: Residuals
Sample 2003M05 2007M10
Observations 39
4
Mean
9.96e-18
Median
0.004317
Maximum
0.063255
3
Minimum
-0.084386
Std. Dev.
0.038659
2
Skewness -0.286813
Kurtosis
2.127258
1
Jarque-Bera
1.772431
Probability
0.412213
0
-0.05
0.00
0.05

Since the Skewness is almost zero and Kurtosis is less than 3, the data follows normal distribution.

7

Dependent Variable: DLOG(ICICI) Method: Least Squares

Date: 02/03/09

Sample (adjusted): 2003M05 2007M10 Included observations: 39 after adjustments White Heteroskedasticity-Consistent Standard Errors & Covariance

Time: 12:18

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C

0.041186

0.061617

0.668423

0.5084

DLOG(BANKEX)

1.070291

0.106202

10.07784

0.0000

DLOG(FII)

0.000381

0.003767

0.101012

0.9201

DLOG(WPI)

1.132593

1.333488

0.849347

0.4016

CRR

-0.008379

0.011999

-0.698336

0.4897

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

0.784890

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

0.065925

0.759583

0.083352

0.040869

-3.437660

0.056791

-3.224383

72.03437

31.01473

2.089395

0.000000

From this result, the conclusions are

a) There is significant relationship between the share price of ICICI and the BANKEX index. There seem to be no significant relationship between the dependant variable and FII, WPI and CRR.

b) Around 76% variations in dependant variable are explained by variations in independent variables.

c) The model is sound in explaining the overall significance of the independent variables on the dependant variable as Prob (F-Statistic) is zero.

d) The Durbin-Watson test statistic is around 2.08, which shows that there is no serial correlation in the model.

e) The linear regression equation is DLOG(ICICI) = 0.041 + 1.070DLOG(BANKEX) + 0.0003DLOG(FII) + 1.136 DLOG(WPI) - 0.008CRR

8

Histogram-Normality Test

Analysis for HDFC

9 8 7 6 5 4 3 2 1 0 -0.10 -0.05 -0.00 0.05 0.10
9
8
7
6
5
4
3
2
1
0
-0.10
-0.05
-0.00
0.05
0.10

Series: Residuals Sample 2003M05 2007M10 Observations 39

Mean

-5.60e-18

Median

-0.001380

Maximum

0.092150

Minimum

-0.115055

Std. Dev.

0.046486

Skewness -0.164158

Kurtosis

2.610191

Jarque-Bera

0.422083

Probability

0.809741

Since the Skewness is almost zero and Kurtosis is less than 3, the data follows normal distribution.

Dependent Variable: DLOG(HDFC) Method: Least Squares

Date: 02/03/09

Sample (adjusted): 2003M05 2007M10 Included observations: 39 after adjustments White Heteroskedasticity-Consistent Standard Errors & Covariance

Time: 12:30

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C

-0.068374

0.064753

-1.055905

0.2985

DLOG(BANKEX)

0.727538

0.136101

5.345596

0.0000

DLOG(FII)

-0.014716

0.006504

-2.262608

0.0302

DLOG(WPI)

-0.623383

1.571663

-0.396639

0.6941

CRR

0.014415

0.012859

1.120994

0.2701

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

0.551686

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

0.040246

0.498944

0.069428

0.049145

-3.068893

0.082116

-2.855615

64.84341

10.45995

2.830740

0.000012

From this result, the conclusions are

9

a) There is significant relationship between the share price of HDFC and the BANKEX index and FII. There is no significant relationship between the dependant variable and WPI and CRR.

b) Around 50% variations in dependant variable are explained by variations in independent variables.

c) The model is sound in explaining the overall significance of the independent variables on the dependant variable as Prob (F-Statistic) is zero.

d) The Durbin-Watson test statistic is around 2.83, which shows that there is no serial correlation in the model.

e) The linear regression equation is DLOG(HDFC) = -0.068 + 0.728DLOG(BANKEX) – 0.015DLOG(FII) – 0.623DLOG(WPI) + 0.014CRR

Histogram-Normality Test

Analysis for AXIS

12 10 8 6 4 2 0 -0.2 -0.1 -0.0 0.1 0.2 0.3 0.4
12
10
8
6
4
2
0
-0.2
-0.1
-0.0
0.1
0.2
0.3
0.4

Series: Residuals Sample 2003M05 2007M10 Observations 39

Mean

1.49e-17

Median

-0.012771

Maximum

0.363968

Minimum

-0.204073

Std. Dev.

0.108238

Skewness

1.225139

Kurtosis

5.520367

Jarque-Bera

20.07868

Probability

0.000044

Since the Skewness greater than zero and Kurtosis is greater than 5, the data does not normal distribution and hence the CRLM seems not the best fit for analyzing AXIS Bank data. So, the data analysis has not been shown. But the probable cause, as obtained from the Stability Test of the model by Ramsey-Reset Test shows that some non-linear combinations of the explanatory variables explains the exogenous variable, that is the CRLM is mis-specified.

10

Ramsey RESET Test:

F-statistic

0.031718

Probability

0.968810

Log likelihood ratio

0.077237

Probability

0.962118

So the null-hypothesis that all regression coefficients of the non-linear terms are zero is rejected, that is the model suffers from mis-specification or lack of stability.

Histogram-Normality Test

Analysis for PNB

8 7 6 5 4 3 2 1 0 -0.2 -0.1 -0.0 0.1 0.2
8
7
6
5
4
3
2
1
0
-0.2
-0.1
-0.0
0.1
0.2

Series: Residuals Sample 2003M05 2007M10 Observations 39

Mean

3.06e-17

Median

-0.006095

Maximum

0.222010

Minimum

-0.198445

Std. Dev.

0.083014

Skewness

0.342269

Kurtosis

3.503667

Jarque-Bera

1.173693

Probability

0.556078

Since the Skewness is almost zero and Kurtosis is almost 3, it can be safely assumed the data approximates normal distribution.

Dependent Variable: DLOG(PNB) Method: Least Squares

Date: 02/03/09

Sample (adjusted): 2003M05 2007M10 Included observations: 39 after adjustments White Heteroskedasticity-Consistent Standard Errors & Covariance

Time: 12:57

Variable

Coefficient

Std. Error

t-Statistic

Prob.

C

0.196965

0.107624

1.830120

0.0760

11

DLOG(BANKEX)

1.449289

0.199477

7.265449

0.0000

DLOG(FII)

0.014258

0.008949

1.593236

0.1204

DLOG(WPI)

-1.616152

2.191599

-0.737431

0.4659

CRR

-0.045938

0.019881

-2.310652

0.0270

R-squared Adjusted R-squared S.E. of regression Sum squared resid Log likelihood Durbin-Watson stat

0.615604

Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion

0.050667

0.570381

0.133894

0.087761

-1.909184

0.261869

-1.695907

42.22908

F-statistic 13.61260

2.369202

Prob(F-statistic) 0.000001

From this result, the conclusions are

a) There is significant relationship between the share price of PNB and the BANKEX index, FII and CRR but no significant relationship with WPI.

b) Around 58% variations in dependant variable are explained by variations in independent variables.

c) The model is sound in explaining the overall significance of the independent variables on

the dependant variable as Prob (F-Statistic) is zero.

d) The Durbin-Watson test statistic is around 2.37, which shows that there is no serial correlation in the model.

e) The linear regression equation is DLOG(PNB) = 0.197 + 1.449DLOG(BANKEX) + 0.014DLOG(FII) – 1.616DLOG(WPI) - 0.046CRR

Model Selection

Comparative analysis

 

Schwarz criterion

Adjusted R-squared

Kurtosis

SBI

-2.875

65%

2.53

ICICI

-3.224

76%

2.12

HDFC

-2.856

50%

2.61

AXIS

NA

NA

5.52

PNB

-1.696

57%

3.50

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This shows that the CRLM as developed here best fits ICICI Bank share price and is not well applicable for explaining AXIS Bank share price variations over the time period April 2003 – March 2008. Except for Axis Bank, which includes non-linear terms as per the Stability test, the model quite well explains the share price fluctuations of the other 4 bank stocks, with no heteroskedasticity or autocorrelation.

Impact of each variable chosen on the dependent variable at 90% confidence level

 

INDEX

FII

WPI

CRR

SBI

Significant

Insignificant

Insignificant

Insignificant

ICICI

Significant

Insignificant

Insignificant

Insignificant

HDFC

Significant

Significant

Insignificant

Insignificant

PNB

Significant

Significant

Insignificant

Significant

This shows that the suitability of the individual parameter selection for the model is best for PNB, whose prices have been affected significantly by 3 of the 4 parameters selected. Obviously, the Index values are highly influencing the share prices of all the stocks. The WPI Inflation parameter and CRR are not too significant. The Foreign Institutional Investment has significant relationship in determining HDFC and PNB share prices, but surprisingly it is not having much affect on SBI and ICICI share prices. This may be attributed to the seasonality affect, as SBI and ICICI have a stable FII portfolio being major stocks and prior to October 2008, the FIIs did not offload much of their investments in these 2 stocks. This analysis is up to March 2008.

General Conclusion This study concludes that using CAPM model do not always serve the purpose in estimating share price fluctuations, as other macroeconomic variables also influence them. But as seen, the greater is the weightages of the stock in the Index or in other words, for stocks with high market capitalizations, other factors tend to become more and more insignificant (viz. SBI and ICICI) and the CAPM model becomes more relevant and accurate. This study is a sincere attempt to study the complexity of stock price estimation and shows that regression estimation models can be evolved with addition of new parameters and their effects on the stock prices.

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References For data collection, macroeconomic factor studies and strategy for building econometric model, following sources have been referred

1. ‘Introductory Econometrics for Finance’ © Chris Brooks 2008.

2. Macroeconomics – 9 th Edition, Tata McGraw Hill by Rudiger Dornbusch, Stanley Fischer, Richard Startz.

3. Working Paper on India’s Macroeconomic Performance and Policies since 2000 by Shankar Acharya, October 2008, ICRIER.

4. Following websites

http://eaindustry.nic.in

http://www.rbi.org.in

http://www.indiastat.com/

http://www.bseindia.com

http://www.sebi.gov.in

http://finmin.nic.in

http://en.wikipedia.org

5. Prowess Database - http://www.cmie.com/database

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