Comparative Analysis of Variation in BSE Sensex

Comparative Analysis of Variation in BSE Sensex w.r.t. its Top 10 Listed Companies, NASDAQ & Nikkei and Gold

Group:

1. 2. 3. 4. 5. 6.

Ajay Kumar Jha Ankit Rungta Arjun Malhotra Gargi Jalan Aditi Pandey Ankur Shah

10FN-006 10FN-016 10HR-009 10DM-188 10DM-006 10DM-018

Comparative Analysis of Variation in BSE Sensex

1. Summary:
1.1. Topic: Comparative Analysis of Variation in BSE Sensex with respect to its Top 10 Listed Companies, NASDAQ & Nikkei and Gold. 1.2. Objective: Our objective is to find out how the BSE Sensex varies according to variation in its top 10 listed companies (according to market capitalization). We will also find out whether there is any similarity in the variation of SENSEX and the price of GOLD. Moreover we will also find out, how the percentage change in SENSEX is dependent on that of NASDAQ and Nikki. 1.3. Methodology: First we have collected data from BSE, NASDAQ, Nikkei, and Yahoo Finance. Then we have used Regression Analysis using Microsoft Excel2007. 1.4. Result: From the Regression Analysis we have got the result that variation in BSE Sensex doesnt depend much on NASDAQ & Nikkei or Gold, but its variation is highly dependent upon the variation of its top 10 listed companies.

2. Introduction:
Our objective is to find out the amount of dependence SENSEX has on its top 15 companies in terms of market capitalization. We will also find out whether there is any similarity in the variation of SENSEX and the price of GOLD. Moreover we will also find out, how the percentage change in SENSEX is dependent on that of Nasdaq and Nikki. 2.1. SENSEX: Bombay stock exchange or BSE is the largest stock exchange in India in terms of number of listed companies in the exchange and the market capitalization of the listed companies. The prime index of the Bombay Stock Exchange is the BSE 30 that is popularly known as the Sensex. The Sensex is made with highly liquid stocks of 30 largest companies in terms of market capitalization. The Sensex was first constructed in the 1986 on 1st of January with just 30 stocks. Over the years of course these stocks have changed time and again according to the condition of the market and economy of the country. The selection of the stocks is made on the basis of market capitalization and liquidity of stocks. The BSE index committee decides on which stock to include in the Sensex and which stock should be removed from the Sensex. This committee is made up of highly placed experts and professionals from the field finance and industry that are well aware of the Indian stock market scenario.

Comparative Analysis of Variation in BSE Sensex

2.2. NASDAQ: The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations," but the exchange's official stance is that the acronym is obsolete. ] It is the largest electronic screen-based equity securities trading market in the United States and fourth largest by market capitalization in the world. With approximately 3,700 companies and corporations, it has more trading volume than any other stock exchange in the world. It was founded in 1971 by the National Association of Securities Dealers (NASD), who divested themselves of it in a series of sales in 2000 and 2001. It is owned and operated by the NASDAQ OMX Group, the stock of which was listed on its own stock exchange beginning July 2, 2002, under the ticker symbol NASDAQ: NDAQ. It is regulated by the Securities and Exchange Commission.

2.3. Nikkei 225 It is a stock market index for the Tokyo Stock Exchange (TSE). It has been calculated daily by the Nikkei newspaper since 1950. It is a price-weighted average, and the components are reviewed once a year. Currently, the Nikkei is the most widely quoted average of Japanese equities, similar to the Dow Jones Industrial Average. In fact, it was known as the "Nikkei Dow Jones Stock Average" from 1975 to 198. The Nikkei 225 began to be calculated on September 7, 1950, retroactively calculated back to May 16, 1949.Currently, the index is updated every 15 seconds during trading sessions. The Nikkei 225 Futures, introduced at Singapore Exchange (SGX) in 1986, the Osaka Securities Exchange (OSE) in 1988, Chicago Mercantile Exchange (CME) in 1990, is now an internationally recognized futures index. The Nikkei average hit its all-time high on December 29, 1989, during the peak of the Japanese asset price bubble, 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. In January 2010, it was 72.9% below its peak. 2.4. GOLD: Gold has been widely used throughout the world as a vehicle for monetary exchange, either by issuance and recognition of gold coins or other bare metal quantities, or through goldconvertible paper instruments by establishing gold standards in which the total value of issued money is represented in a store of gold reserves. However, the amount of gold in the world is finite and production has not grown in relation to the world's economies. Today, gold mining output is declining.With the sharp growth of economies in the 20th century, and increasing foreign exchange, the world's gold reserves and their trading market have become a small fraction of all markets and fixed exchange rates of currencies to gold were no longer sustained Many holders of gold store it in form of bullion coins or bars as a hedge against inflation or other economic disruptions. However, some economists do not believe gold serves as a hedge against inflation or currency depreciation.

Comparative Analysis of Variation in BSE Sensex

3. Objectives:
Our objective is to find out how the BSE Sensex varies according to variation in its top 10 listed companies (according to market capitalization). To find out whether there is any similarity in the variation of SENSEX and the price of GOLD. To find out, how the percentage change in SENSEX is dependent on that of NASDAQ and Nikkei.

4. Methodology:
4.1. Regression analysis: In statistics, regression analysis includes any techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps us understand how the typical value of the dependent variable changes when any one of the independent variables is varied, while the other independent variables are held fixed. Most commonly, regression analysis estimates the conditional expectation of the dependent variable given the independent variables that is, the average value of the dependent variable when the independent variables are held fixed. Less commonly, the focus is on a quantile, or other location parameter of the conditional distribution of the dependent variable given the independent variables. In all cases, the estimation target is a function of the independent variables called the regression function. In regression analysis, it is also of interest to characterize the variation of the dependent variable around the regression function, which can be described by a probability distribution. Regression analysis is widely used for prediction and forecasting, where its use has substantial overlap with the field of machine learning. Regression analysis is also used to understand which among the independent variables are related to the dependent variable, and to explore the forms of these relationships. In restricted circumstances, regression analysis can be used to infer causal relationships between the independent and dependent variables. Tools Used Microsoft Excel 2007 Assumption 1. The populations follow normal distribution. 2. The populations are independent.

Comparative Analysis of Variation in BSE Sensex

5. Data Analysis:
5.1. Regression Analysis of BSE and top 10 Companies:

The regression output has three components: 1. Regression statistics table 2. ANOVA table 3. Regression coefficients table.

Overall equation would be: BSE = 0.117662433*RIL + 0.069490297*ONGC + 0.149307239*SBI + 0.05761936*TCS + 0.065782683*NTPC + 0.166616347*Infosys + 0.166305861*BHEL + 0.049933532*Bharti Airtel + 0.107791553*ITC + 0.102230324*L&T - 0.000135078 The above result shows that variation in BSE index is highly dependent upon variations of its 10 major shares.

Comparative Analysis of Variation in BSE Sensex

Interpret Regression Statistics Table This is the following output. Of greatest interest is Adjusted R Square. Explanation Multiple R R Square Adjusted R Square 0.938169167 0.880161386 0.871082703 square root of R2 R2 Adjusted R2 used if more than one x variable This is the sample estimate of the standard deviation of the error u Number of observations used in the regression (n)

Standard Error 0.003725963 Observations 143

R Square: This is the most important number of the output. R Square tells how well the regression line approximates the real data. This number tells you how much of the output variables variance is explained by the input variables variance. Here R2 = 0.88. Adjusted R Square: This is quoted most often when explaining the accuracy of the regression equation. Adjusted R Square is more conservative the R Square because it is always less than R Square. Another reason that Adjusted R Square is quoted more often is that when new input variables are added to the Regression analysis, Adjusted R Square increases only when the new input variable makes the Regression equation more accurate (improves the Regression equations ability to predict the output). R Square always goes up when a new variable is added, whether or not the new input variable improves the Regression equations accuracy. Adjusted R2 = 0.871 means that 87.1% of the variation of BSE around its mean is explained by the regressors (top 10 companies). Standard Error: The standard error here refers to the estimated standard deviation of the error term u. It is sometimes called the standard error of the regression. It is not to be confused with the standard error of y itself or with the standard errors of the regression coefficients given below.

Interpret ANOVA Table ANOVA table for our case is given: df Regression 10 Residual Total SS MS F Significance F

0.013459114 0.001345911 96.94813643 8.5407E-56

132 0.001832529 1.38828E-05 142 0.015291644

Significance of F: This indicates the probability that the Regression output could have been obtained by chance. A small Significance of F confirms the validity of the Regression output. For example, if Significance of F = 8.5407E-56, there is only 8.5407E-54 % chance that the Regression output was merely a chance occurrence. In this case it is almost zero.

Comparative Analysis of Variation in BSE Sensex

Interpret Regression Coefficients Table The regression output of most interest is the following table of coefficients and associated output:
Coefficients Intercept RIL ONGC SBI TCS NTPC Infosys BHEL Bharti Airtel ITC L&T Standard Error t Stat P-value Lower 95% -0.000763047 0.076133935 0.027874885 0.096755148 0.000994921 -0.002690278 0.098116154 0.106210902 0.021363279 0.059231255 0.052309689 Upper 95% 0.000492891 0.159190931 0.111105709 0.20185933 0.114243799 0.134255645 0.23511654 0.22640082 0.078503785 0.156351851 0.152150959 Lower 90.0% Upper 90.0%

-0.000135078 0.000317461 0.117662433 0.069490297 0.149307239 0.05761936 0.065782683 0.166616347 0.166305861 0.049933532 0.107791553 0.102230324 0.020994147 0.021038086 0.026566969 0.028625688 0.034615542 0.034629308 0.03038016 0.014443289 0.024548975 0.025236674

-0.425494878 0.671168857 5.604534972 3.303071308 5.620032777 2.012855034 1.90038001 4.811425852 5.474160087 3.457213396 4.390877963 4.050863604 1.16836E-07 0.001230869 1.08687E-07 0.046163983 0.059563972 4.03061E-06 2.13689E-07 0.000734897 2.29397E-05 8.65757E-05

-0.000660945 0.000390789 0.082886063 0.034641144 0.105299605 0.010201501 0.008442756 0.109253616 0.115981755 0.026008523 0.067126685 0.060426297 0.152438803 0.104339449 0.193314873 0.105037219 0.12312261 0.223979078 0.216629967 0.073858541 0.148456421 0.144034351

Coefficients: In simple or multiple linear regression, the size of the coefficient for each independent variable gives you the size of the effect that variable is having on your dependent variable, and the sign on the coefficient (positive or negative) gives you the direction of the effect. In regression with a single independent variable, the coefficient tells you how much the dependent variable is expected to increase (if the coefficient is positive) or decrease (if the coefficient is negative) when that independent variable increases by one. In regression with multiple independent variables, the coefficient tells you how much the dependent variable is expected to increase when that independent variable increases by one, holding all the other independent variables constant. Remember to keep in mind the units which your variables are measured in. Standard Error: The standard error is an estimate of the standard deviation of the coefficient, the amount it varies across cases. It can be thought of as a measure of the precision with which the regression coefficient is measured. If a coefficient is large compared to its standard error, then it is probably different from 0. t Stat: The t statistic is the coefficient divided by its standard error. P-value: The P-Values of each of these provide the likelihood that they are real results and did not occur by chance. The lower the P-Value, the higher the likelihood that that coefficient or Y-Intercept is valid. For example, a P-Value of 1.16836E-07 (in the case of RIL) for a regression coefficient indicates that there is only 0.00001168% chance that the result occurred only as a result of chance.

Comparative Analysis of Variation in BSE Sensex

5.2. Regression Analysis of BSE and NASDAQ & Nikkei:

Overall equation would be: BSE = 0.009958446*NASDAQ + 0.315843341*Nikkei + 0.000499004 The above result shows that variation in BSE index is not dependent upon the variation in NASDAQ & Nikkei indexes. Though, its the common perception that the BSE index varies according to the variation in the NASDAQ & Nikkei indexes, but our results shows that the perception is not true.

Interpret Regression Statistics Table This is the following output: Explanation Multiple R R Square Adjusted R Square 0.45197131 0.204278065 0.19184491 square root of R2 R2 Adjusted R2 used if more than one x variable This is the sample estimate of the standard deviation of the error u Number of observations used in the regression (n)

Standard Error 0.009234468 Observations 131

Adjusted R2 = 0.1918 means that 19.18% of the variation of BSE around its mean is explained by the regressors (NASDAQ & Nikkei). Which is very low.

Comparative Analysis of Variation in BSE Sensex

Interpret ANOVA Table ANOVA table for our case is given: df Regression 2 Residual Total SS MS F Significance F

0.002802168 0.001401084 16.43010658 4.45374E-07

128 0.010915252 8.52754E-05 130 0.01371742

F = 4.45374E-07 means there is only 0.000045% chance that the Regression output was merely a chance occurrence. In this case it is almost zero.

Interpret Regression Coefficients Table The regression output of most interest is the following table of coefficients and associated output:
Coefficients Intercept NASDAQ Nikkei 0.000499004 0.009958446 0.315843341 Standard Error t Stat 0.000810559 0.071257129 0.068940107 0.615629288 0.139753674 4.581416432 P-value 0.539232325 0.889074281 1.08176E-05 Lower 95% -0.001104825 -0.131035956 0.179433562 Upper 95% 0.002102832 0.150952847 0.45225312 Lower 90.0% Upper 90.0%

-0.000843966 0.001841974 -0.108103588 0.128020479 0.201620253 0.430066429

P-Value of 0.889074281 (in the case of NASDAQ) for a regression coefficient indicates that there is only 88.9% chance that the result occurred only as a result of chance. However in the case of Nikkei its 0.0000108%.

Comparative Analysis of Variation in BSE Sensex

5.3. Regression Analysis of BSE and Gold:

Overall equation would be: BSE = -0.202475256*NASDAQ + 0.000229806 The above result shows that variation in BSE index is not dependent upon the variation in Gold. But the result is showing that there is some inverse relationship between the variation in BSE index and that in Gold price. Its the common perception that the price of gold increases when the market is going down and our result confirms that, but our result explains only 2.06% of the variation.

Interpret Regression Statistics Table This is the following output: Explanation Multiple R R Square Adjusted R Square Standard Error Observations 0.16585462 0.027507755 0.020610647 0.010269767 143 square root of R2 R2 Adjusted R2 used if more than one x variable This is the sample estimate of the standard deviation of the error u Number of observations used in the regression (n)

Adjusted R2 = 0.0206 means that 2.06% of the variation of BSE around its mean is explained by the regressors (Gold). Which is very low.

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Comparative Analysis of Variation in BSE Sensex

Interpret ANOVA Table ANOVA table for our case is given: df Regression 1 Residual Total SS 0.000420639 MS 0.000105468 F Significance F

0.000420639 3.98830269 0.047741886

141 0.014871005 142 0.015291644

F = 0.047741886 means there is only 4.77% chance that the Regression output was merely a chance occurrence.

Interpret Regression Coefficients Table The regression output of most interest is the following table of coefficients and associated output:
Coefficients Intercept 0.000229806 Gold -0.202475256 Standard Error 0.000859227 0.10138598 t Stat 0.267457273 P-value 0.789507929 Lower 95% -0.001468826 -0.402908389 Upper 95% 0.001928439 -0.002042124 Lower 90.0% -0.001192843 -0.370343296 Upper 90.0% 0.001652456 -0.034607216

-1.997073531 0.047741886

P-Value of 0.047741886 (in the case of Gold) for a regression coefficient indicates that there is only 4.77% chance that the result occurred only as a result of chance.

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Comparative Analysis of Variation in BSE Sensex

6. Conclusion:
From the Regression Analysis we have got the result that variation in BSE Sensex doesnt depend much on NASDAQ & Nikkei or Gold, but its variation is highly dependent upon the variation of its top 10 listed companies.

7. Recommendation:
As we have seen from the result that the variation in BSE Sensex is more dependent on the top 10 companies. However the common perception is that it varies according to the variation in NASDAQ and Nikkei. So based on our project report we would suggest the common trader to trade into the share market by seeing the result of top 10 companies like RIL, ONGC, TCS, Infosys rather than watching the Index of NASDAQ and Nikkei.

8. Bibliography:
References http://www.bseindia.com/ http://www.nasdaq.com/ http://e.nikkei.com/e/fr/marketlive.aspx http://in.finance.yahoo.com http://www.mcxindia.com http://www.wikipedia.org/

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