Essays on Relationship between the Macroeconomic Variables and the Stock Market Prices Coursework

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The paper 'Relationship between the Macroeconomic Variables and the Stock Market Prices" is a perfect example of macro and microeconomics coursework.   The Nobel Peace Prize winner Paul Samuelson wrote in a Newsweek column that Wall Street Indexes predicted nine out of the last five recessions. This was widely seen as a joke but it later came to be understood as an important aspect of the stock market. The quote mainly indicates that there is a relationship between the macroeconomic variables and the stock market prices. The trends in the stock market prices are as a result of the events in the macroeconomic environment (Bodie, Kane & Marcus, 2008).

The stock market plays an essential role in financial intermediation. This enables the business in both the developing and developed countries to obtain extra funds that may be used to support the growth and development. The amount that can be raised is dependent on the stock market prices. The fall in the stock market prices has negative impacts on the investors. The investors may end up with massive losses when the process in the stock market falls.

The external factors that influence the growth and development of the economy are considered as the macroeconomic variables (Brealey, Myers & Allen, 2008). The stock market prices are related to the macroeconomic variables. This has been highlighted in both the developing and developed countries. The global recession which was witnessed in 2008 had a direct impact on the stock prices. The same is also applicable when global oil prices fell. The paper thus discusses the relationship between the stock Market prices and the macroeconomic variables. Discussion Arbitrage pricing and the capital asset pricing model According to the Arbitrage pricing model, the return on an asset is specified as a number of risk factors which are common in that asset class.

The model further indicates that investors are usually interested in taking advantage of the arbitrage opportunities that are found in the broader market (Brigham & Houston, 2009). This, therefore, makes the rate of return a function of the return on alternative investment as well as the risk factors. The theory indicates that the risk factors influence the performance of the investment.

Assets in different categories have different sensitivity to the risks in the market environment. The theory indicates that the macroeconomic variables have a direct impact on the returns in the stock market. This is mainly based on the ability to influence cash generation by the firms. The macroeconomic variables have a direct influence on the discount rates which affects the ability of the firm to generate cash or pay dividends. This, therefore, ends up affecting the prices in the stock market. The theory indicates that the fundamental valuation model plays a vital role in determining the prices of the stock (Brown & Reilly, 2008).

The process is thus discounted based on the expected future dividends. The model thus indicates that any systematic influence that affects future dividends is likely to affect the stock process. The macroeconomic variables are known to have a direct impact on future dividends. The theory, therefore, suggests that the macroeconomic variables have a direct influence on stock prices. This theory, however, makes an assumption of homogenous expectations and perfect competition.

References

Bodie, Z., Kane, A. & Marcus A. J. (2008). Essentials of Investments, 8th Edition. New Jersey McGraw-Hill.

Brealey, R.A., Myers, S.C. and Allen, F. (2008). Principles of Corporate Finance, 9th Edition. New Jersey: McGraw-Hill.

Brigham, E.F. & Houston J.F. (2009). Fundamentals of Financial Management, 12th Edition. South-Western.

Brown, K.C. & Reilly, F.K. (2008). Investment Analysis and Portfolio Management, 9th Edition. South Western College, International Edition.

Elton, E.J., Gruber, M.J., Brown, S.J. & Goetzmann, W.N. (2006). Modern Portfolio Theory and Investment Analysis, 7th Edition. London: John Wiley & Sons.

Haugen, R.A. (2000). Modern Investment Theory, 5th Edition. New Jersey: Prentice Hall.

Jones, C.P. (2006). Investments: Analysis and Management, 10th Edition. NY: John Wiley & Sons.

Reilly, F.K. & Norton, E.A. (2006). Investments, 7th Edition. NY: Thomson South-Western.

Shiller, R.J. (2006). Irrational Exuberance, 2nd Edition. Broadway Business.

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