Title: Relationship of Larsen & Toubro Ltd (LT) share prices with Nifty 50.
Author: Lavina Jain
Introduction: Larsen & Toubro Ltd, commonly known as L&T is an Indian multinational conglomerate company, with business interests in engineering, construction, manufacturing, technology & financial services, headquartered in Mumbai. It was founded by Henning Holck Larsen & Soren Kristian Toubro. Current CEO is S N Subrahmanyan. The dividend yield is 0.97%, Market Cap comprises of 3.17T INR & its P/E ratio is 31.
Objective: Calculation of Beta (the change in L&T with respect to change in nifty) and it’s significance.
Literature Review:
1.) Analyzing time–frequency relationship between interest rate, stock price and exchange rate through continuous wavelet.
The present paper contributes to the existing literature in the following aspects. First, while conventional studies tend to focus on the pair-relations between stock prices, exchange rates and interest rates, I examined the joint movement of all three variables.
Second, the analysis is based on the approaches of the cross-wavelet power, the cross-wavelet coherency, and the phase difference that allows us to avoid the non-stationarity problems of the time-series.
Third, i studied the particular case of an emerging economy, namely India. In the last decade, the Indian economy has witnessed a dramatic transformation from a highly regulated environment to the one that is more market-oriented and has also experienced significant integration with the global economy.
The main advantage of wavelet analysis is the ability to decompose the data into several time scales and ability to handle non-stationary data and localization in time. Finally the short-run and long-run relationship is clearly established through wavelet time scales, it provides us a holistic picture on the entire relationship. (Andries 7 etal,2014)
2.) Spillover effects between exchange rates and stock prices: Evidence from BRICS around the recent global financial crisis
This research paper highlighted the Spillover effects tested between exchange rates and BRICS stock returns, exchange rates significantly impact stock returns, center–periphery relations exist in U.S. and BRICS stock markets, financial crisis aggravated spillover effects between exchange and stock markets.
The research countries are Brazil, Russia, India, China, and South Africa (BRICS) in the regime of managed floating exchange rate, but China manipulates the foreign exchange rate, interest rate and restricts foreign capital flows most strictly. I find significant spillover effects from foreign exchange rates to stock returns in the short-run, but not vice versa. U.S. Stock & Prices significantly influence stock markets in Brazil, China, and South Africa. Furthermore, there are stronger spillover effects between exchange rates and stock returns during the 2007–2009 financial crisis. (Sui & etal,2016)
Data Collection: Data was collected from yahoo finance historical data, then it was manipulated by finding the Friday closing price. After that weekly returns for nifty and L&T was calculated which was written as X & Y. By doing regression through data analysis various values such as b, t stat, R^2, F, standard deviation & standard error were calculated.
Data Analysis:
L&T Returns (Y)= 0.503 + 1.23 Nifty Returns (X)
( 8.019)
N= 51, R^2= 0.568, F= 64.317, Beta= 1.23.
The above equation shows the relationship between X & Y. (+) sign means there is a direct relationship which implies that if X rises, Y also rises & vice versa. In this equation b=1.23, that is if X rises by 1 unit, demand (Y) will rise by 1.23 units. Figure in bracket is T stat value for b , it is more than the table value, hence reject H0 & accept H1. Alternate Hypothesis & hence b is statistically significant at 5% significance level.
R^2= 0.568, which means 56.8% of Y is explained by X, similarly F= 64.317 which is also greater than table value. Hence reject H0 & accept H1. Alternate Hypothesis. Hence overall model is statistically significant at 5% Significance level.
Conclusion: since it can be seen that value of b (beta) is more than 1 which implies that L&T is good for short term investment.
References:
Andries, Alin Marius & Ihnatov, Ihnatov, Iulian & Tiwari, Aviral kumar, 2014. “Analyzing time–frequency relationship between interest rate, stock price and exchange rate through continuous wavelet,” Economic Modelling, Elsevier, vol. 41 (C), pages 227-238.
Sui, Lu & Sun, Lijuan, 2016. “Spillover effects between exchange rates and stock prices: Evidence from BRICS around the recent global financial crisis”, Research in International Business and finance, Elsevier, vol.36 (C), pages 459-471.