Factor Analysis Approach to Find out the Relationship between the Macro Economic Variables and Stock Market Return: A Case Study of NSE

Abstract

stock exchanges are the barometer of the corporate performance in the country, therefore the economic factors have a direct impact upon the stock market performance. Therefore the stock market reflects the performance of the corporate world as well as the changes in the economic variables. The same thing has been supported in the Asset pricing model (APT) proposed by Ross (1976). According to this theory says that the stock return can also be affected by the many micro and macro-economic variables along with the individual company performance.

This paper has applied the factor analysis approach for the study of the impact of the economic variable upon the market return. There is a risk of effect of multi co linearity among the economic variables chosen for the study. As it will be difficult to find out which variable is affecting the market return how much. Therefore factor analysis has been used to reduce the variables into group of factor and later use these group variables to predict theirs effect on the stock market return. For this regression analysis has been used. The factor analysis showed that the major macroeconomic variables that affect the stock market return are the economic efficiency within the country and the foreign exchange of the country. The regression analysis revealed that the variables are explaining about 92% variation in the market return. This will help the investor to design the investment portfolio.