Stock market prices uk
The Arbitrage Pricing Theory (APT) offers an interesting insight into risk management of financial investment in risky assets, such as listed shares in stock markets. the intuition of linking share prices to economic and financial variables is based on the capital market theory of asset prices, which states that asset prices are a function of expected cash flow and the discount rate. Consequently, any observed economic and financial variable that either determines the cash flow or the discount rate of listed shares would be a good candidate for a systematic factor in the APT framework.
"Empirical results of testing the APT model using observed economic and financial variables in Japan, the UK and USA markets have identified a number of variables that are significantly priced, like the term structure of interest rates, inflation, market risk premium, industrial production, money supply and commercial bank's lending to the private sector.
The oil prices variable is common to all countries which are either major world oil producers or where oil sector activities dominate the economic activities. Another observed variable, which we will be considering as a source of systematic risk for Norway, Mexico, Venezuela and Oman, is the Financial Times and Standard & ; Poor world stock markets price index.
The interest rates variable for the UK is taken as the difference between the monthly yield on long-term government bonds and the yield on three-month Treasury bills. The oil prices data is measured in US dollars per barrel and is based on the UK Brent crude one-month forward prices. These same benchmark crude oil prices will be used for Norway, Mexico, Venezuela and Oman. The UK retail price index is taken as a measure of inflation at the end of the month. Since there is a one-month lag in the announcement of the inflation rates, that series will adjust to reflect the time lag. This means that the April inflation rate will be used in May. The same adjustment is made to the oil prices. One-month forward prices of oil are normal available to the public, so, instead of using the contemporaneous oil prices with the share prices will be using the one-month forward oil prices. All the variables except the commercial banks lending to the private sector are from Data stream database ; the latter is from the IMF financial statistics database.
After identifying the economic and financial variables, which are considered as systematic factors in determining the share prices of listed companies in the UK stock market, the next step is to determine their order of integration. The purpose of determining the order of integration for each variable is to use their stationary forms.
The positive price of risk for the US S & ; P composite price index variable indicates that there is a very high direct relationship between the UK and the US stock markets. The movement of share prices in the US stock market exerts a strong influence on share prices in the UK stock market. For example, if there is a significant drop in the prices of listed shares in the US stock market due to a negative sentiment about the economic outlook for the US economy and at the same time the fundamental factors which are expected to be significant in determining share prices in the UK stock market are sound justifying stability in the prices of listed shares, it is more likely that the net effect would be a proportionate decline in the UK stock prices due to there being a significant positive price of risk for the S P composite price index factor.
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