Essay on Multiple Regression Model

2108 Words Apr 9th, 2013 9 Pages
Project: Multiple Regression Model

Introduction

Today’s stock market offers as many opportunities for investors to raise money as jeopardies to lose it because market depends on different factors, such as overall observed country’s performance, foreign countries’ performance, and unexpected events. One of the most important stock market indexes is Standard & Poor's 500 (S&P 500) as it comprises the 500 largest American companies across various industries and sectors. Many people put their money into the market to get return on investment. Investors ask themselves questions like how to make money on the stock market and is there a way to predict in some degree how the stock market will behave? There are lots and lots of
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Compared to Germany, which is the 5th country the USA invests into, Spain is the 31st country on the list. There should not be any correlation between these two variables, so we included Spain’s GDP into our regression to check our hypothesis.

β7: Gross Domestic Product of Germany is an indicator of Germany is the 5th largest economy in the world and is the largest European trade and investment partner of the US. Germany is the largest economy in Europe and almost 1/5 of GDP of the European Union is that of Germany alone. We assume that this variable has to have an impact on the US stock market.

The second regression model is the following:

S&P500 (Annual Average) = β0 + β1*(Annual CPI) + β2*(Annual Average House Price Index) + β3*(Annual Average Interest Rate) + β4*(Average Annual Unemployment Rate) + β5*(Annual Average GDP of US) + β6*(Annual Average GDP of Germany) + β7*(Annual Average GDP of China) After we run the regression of the second model, it resulted in improving of our model accuracy. We excluded PPI, GDP of Spain because it came out that these variables have no impact on the US stock market. Also, we added the unemployment rate and GDP of China because it is the largest US business partner. Here is the explanation of the new variables: Unemployment Rate is one of the most important factors of the economy’s performance. High unemployment rate decreases the buyer power of the consumers. 2/3 of the US economy is

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