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The Behavior of Stock Markets (Ref No: 1353)

 

Table of Contents

  1. Introduction. 
  2. Literature Review… 

2.1 The Determinants of Stock Market Return. 

2.2 Macroeconomic factors affecting the Stock Market Returns. 

2.2.1 Interest Rate and Money Supply. 

2.2.2 Inflation Rate. 

2.2.3 Political and Social Situation.

2.3 The impacts of War and Terror on the Economies and Financial Markets of Affected Countries  

  1. Methodology. 

3.1 The ICB Data Base and Crisis Variables. 

3.2 Stock Market Data. 

3.3 Data Analysis. 

3.4 Ethical Considerations and Limitations of the Study. 

  1. Data Analysis. 

4.1 International Wars / Conflicts and FTSE-100 Index. 

4.2 International Wars / Conflicts and FTSE-250 Index. 

4.3 International Wars / Conflicts and FTSE-350 Index. 

  1. Conclusion and Recommendations. 

5.1 Conclusion.

5.2 Recommendations to the Investors. 

5.3 Recommendations to the Future Researchers. 

References. 

 

List of Tables

Table 1 – t-test Analysis for FTSE-100.

Table 2 – t-test Analysis for FTSE-250 Index.

Table 3 – t-test Analysis for FTSE-350 Index. 

List of Figures

Figure 1 – Trend Analysis for FTSE-100 Index. 

Figure 2 – Trend Analysis for FTSE-250 Index. 

Figure 3 – Trend Analysis of the FTSE-350 Index. 

 

Abstract

The Behavior of Stock Markets , The main purpose of the research is to study and analyse the behaviour of stock markets at the beginning of wars with a focus on the analysis of the London Stock Exchange. Three indexes listed on the London Stock Exchange have been considered for this research including FTSE 100, FTSE 250 and FTSE 350 Index. The research is mainly based on the secondary data which includes both the qualitative and quantitative data. The data for wars and conflicts have been collected from the ICB database and the data for stock market returns has been collected from Yahoo Finance. The stock market returns are analysed for a total of 43 conflicts available on ICB database for the period from 1987 till 2007.

The data analysis is carried out by trend analysis on cumulative average abnormal returns and statistical significance on these returns is checked by the t-test analysis. The data analysis has been carried out for a total of 101 days including 50 days before and 50 days after the war. On the basis of the research, it has been found that there is a statistically significant negative impact of the wars on the returns of the stock market.

It has also been found that the stock markets start behaving negatively 10 days before the start of the war on average due to the effects of news on the stock market. It is also concluded on the basis of literature studied that the returns on other asset classes vary from that of the stock market in the period of wars. In a nutshell, the data analysis and past literature on a whole suggest that stock markets behave adversely at the beginning of wars causing a significant decline in stock market returns. The recommendations to the investors and future researchers are also provided at the end of research.

1.    Introduction

The research aims to study and analyze the behaviour of stock markets at the beginning of wars with a focus on an analysis of the London Stock Exchange. Different indexes listed on the London Stock Exchange have been considered for this research including FTSE 100, FTSE 250 and FTSE 350 Index. In the view of Schwert (1989), the stock market returns are volatile due to their dependency on multiple macroeconomic, microeconomic and global factors. The microeconomic factors can impact a particular industry or company, macroeconomic factors can impact all industries in one country only, The Behavior of Stock Markets  and the global factors impact multiple countries around the globe. These global factors can include the global financial crisis and wars which have impacts on multiple countries.

Since the wars have got the relevancy to macro and global economics so one such conflict can possibly impact multiple stock exchanges simultaneously. Therefore, this research has been carried out to analyze the extent to which the domestic and international wars and conflict can impact FTSE. The research carries significant value to the academics and the financial industry as it will help us explore the impact of wars on the stock market. Consequently, the financial industry will be able to manage their investments effectively when the wars are expected to start. Also, the academic literature will be enhanced in the related field and future researchers will have a better insight into the impact of wars on the stock market.

2.    Literature Review

The section aims to analyze the findings of past researches and key concepts related to the research area.

2.1The Determinants of Stock Market Return

In accordance with Diebold and Yilmaz (2008), every micro and macroeconomic factor has a direct or indirect impact on the stock market. To analyze the performance of the stock market, the stock market indexes are formed. The stocks need to qualify certain criteria to be part of the stock index and there are multiple indexes for every single stock exchange. The stock market is traced by the return on those indexes and that return can be traced for different periods such as daily, monthly, half-yearly and yearly.

The stock market return also depicts the performance of the economy and industries collectively. According to Brigham and Houston (2011), the stock market returns can be divided into two types of returns i.e. capital gains and dividend yield. The capital gains denote the return earned by the movement in prices of the stocks, and the dividend yield is the return earned by dividend payment from the income of the company. Either of these two returns can be higher depending on the stage of the industry, the strategy of the company and type of the company’s stock, for example, income stocks pay a higher dividend and have lower capital gains when compared to high cap stocks.

To determine and forecast these returns, there is no single determinant for a single stock or the whole stock market. The factors are divided into microeconomic and macroeconomic factors. The microeconomic factors are also known as the non-systematic factors and the macroeconomic factors are known as the systematic factors. The microeconomic factors include the company and industry-specific factors and these can impact the returns on a particular company or the industry. However, the macroeconomic factors such as inflation, interest rate, and similar factors can affect the performance of the stock market as a whole (Zhuosi, 2006). Beran and Ocker (2012) contradict the findings slightly and state that the microeconomic factors do not affect one company or industry practice, but have an impact on related companies and industries as well.

These are said to be positively correlated stocks; this means that when the return on one stock increases, the return on other stock also increases and vice versa. There are also some stocks which are negatively correlated with each other; these companies belong to different industries which are a substitute for one another. In this case, an increase in the return of one stock leads to a decrease in the return of another stock and vice versa. In a nutshell, it can be stated that the stock returns are not determined by a single factor but there are multiple factors affecting the stock returns at one time. These factors can affect stocks regardless of the industry and country of operations.

2.2Macroeconomic factors affecting the Stock Market Returns

In the view of arbitrage stock pricing theory and capital asset pricing model, it is found that different macroeconomic primarily economic factors affect the stock market returns and stock prices at the same time. Some of these macroeconomic factors are quantitative while others cannot be quantified due to the nature of variables (Beran and Ocker, 2012). Some of the factors that impact all the industries, in general, are discussed here.

2.2.1Interest Rate and Money Supply

The interest rate impacts all the securities in an economy including both fixed income and equity securities. It also impacts the value of the financial derivative. Whenever a country changes its’ monetary policy, it impacts the returns on fixed income instruments directly……