Various Factors affecting the Stock Market

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TABLE OF CONTENTS

CHAPTER # 1: INTRODUCTION1

Problem Statement2

Purpose of Study3

Hypothesis3

Structure of the Thesis4

CHAPTER # 2: LITERATURE REVIEW5

Stock Markets and Economic Growth8

CHAPTER # 3: METHODOLOGY12

Data Base13

Data: Variables13

Dependent Variables13

Independent Variables14

Data Analysis14

REFERENCES15

CHAPTER # 1: INTRODUCTION

Outperforming the market's return is the primary goal for an individual/professional investor, who is willing to spend his /her time in search of investment opportunities. A primitive strategy could easily deliver the market return as measured by the FTSE 100, and would require that the investor follows a simple "buy-and-hold" strategy on an index fund. The passive strategy has low opportunity cost unlike an active strategy where an investor will likely incur higher transaction costs and invest a considerable amount of time researching potential investment opportunities (Dracher and Wagner 2006 63). Thus, for an investor who chooses not to invest in market index funds, the opportunity cost is generally higher which means that the only reason for engaging in active portfolio management would be to outperform the market.

Many strategies have been developed over the years with the objective of outperforming market returns. One of these is value investing. Value investing strategies are generally derived from fundamentals of a company (i.e., accounting values) and are practiced in different forms by various market participants. The essence of value investing is to buy assets at a significant discount to intrinsic value and hold them until the market value reflects this intrinsic value. However, evaluating the intrinsic value of a firm is not a trivial matter and the issue has been the subject of many value investing books, and the field of finance in general. The characteristic that define the economics of a business depend on their field of operation. Some firms operate in capital intensive industries such as mining, manufacturing, retail etc. Others operate in labour intensive industries such as technology, services, banking etc.

Problem Statement

Depending on a firm's cost of capital and input costs, valuation of firms between different industries, and sometimes within the same industry, can differ significantly. In addition, there is not one unique method that is used to evaluate a firm's intrinsic value, which adds to subjectivity. Valuation is performed using models such as dividend discount model, discounted cash flow model, capital asset pricing model, relative valuation model, etc. The intrinsic value of a firm can differ quite significantly depending on the model used to value the firm. Furthermore, most of these models require projections of a firm's growth rate of earnings well into the future and then discounting them back to present value. This requires assumptions about future growth rates and discount rates, which can be incorrect. In the book "Security Analysis", Lord and Ranft (2000) laid out an objective (numerical) test of evaluating the intrinsic value of a firm the net-working capital test. The test required that an investor purchase a security only when it is selling below two-thirds of its liquidation value. There are three main rational for purchasing net-networking capital stocks:

First, if the firm fails to operate efficiently it can ...