In this empirical project I will try to explain the relationship between the oil prices, gold prices and stock market in the United State using yearly time series data. Since the gold and oil prices are raising their influence on stock market is also increasing and we will see how fluctuations in oil prices and gold prices impact the stock market in the United States. So here oil prices and gold prices will be our explanatory variable and stock market index will be our explained variable. In this study we will use multiple regression analysis to explain the relationship. The data is collected from years 1961 to 2010 so the sample size is 50. The explanatory variable gold is in average us dollars per ounce and crude oil is in average us dollars per barrel both are on yearly basis and are nominal. The data is collected from the website inflationdata.com. (Source:-http://www.fintrend.com/charts/gold-vs-oil-chart/). The explained variable stock market is represented by the SNP 500 since it is one of the most commonly used benchmark for overall US stock market. I have taken yearly returns are taken from year 1961 to 2010. (Source:- http://www.financeandinvestments.blogspot.com/2011/05/historical-annual-returns-for-s-500.html). The model used for multiple regression analysis is of the form Y = 0+ 1X1+ 2X2+ u Here Y = stock market annual returns in percentage,X1 = crude oil prices in us dollars per barrel, X2= gold prices in us dollars per ounce The Standard and Poor’s 500 is an index containing 500 large companies of the US and is one of the most commonly used benchmarks for the overall U.S. stock market. It is better than Dow Jones Industrial Average because DJIA only contains 30 companies so SNP 500 can better represent the overall US stock market. I chose gold because gold is considered as the universal commodity and an investment tool. Gold is a global currency and hedge against inflation and other currencies because it is a stable commodity so it has a direct impact on the performance of the stock market. The relationship between gold prices and stock market is expected to be positive which means as gold prices increase the stock prices are expected to be increase as well. Oil is also a factor that affect the stock market and analyst strongly believe that there is a direct relationship between the price of oil and stock market. The relationship between oil and stock prices is accepted to be a negative which means that when oil prices go down the stock prices are expected to go up. However there is no right and wrong answer that how oil and gold prices affect the stock market but majority of analysts all over the world agree that price of gold and oil has a direct impact on stock market. LITERATURE REVIEW
A significant amount of literature is available that shows the relationship between stock market returns and other macroeconomic variables. In 1970 Famma conducted survey on the behavior of stock market returns and his Famma theory of efficient market hypothesis suggest that stock market are only efficient when they reflect the true fundamental macroeconomic behavior. In another study performed by Poterba and Summers in 1988 they showed that the US stock returns have a mean reverting tendency and therefore they can be predicted to some extent. Based on these subsequent studies we can say that efficient market hypothesis holds in the US market and there are strong relationships between stock market and real economic variables like GDP, inflation, industrial production and employment. Since gold and oil both have a strong relationship with inflation so therefore so we can say that the fluctuations in both gold and oil prices have a impact on the stock market. Industries like electronic, rubber, chemical, cement, automobile, food and textile will be influenced by changes in the oil and gold...
Please join StudyMode to read the full document