Previous Research

b) Previous Research
a) Sudeep Jain: Indian Shares Fall on Industrial Output Data.

Indian shares fell for the fifth straight session Monday as a lower-than-expected February factory output reading sparked concerns that high interest rates and rising raw-material prices were hurting economic growth. News of an earthquake in northern Japan, which the Japan Meteorological Agency said had a magnitude of 7.0, spurred further selling late in the session.

The Bombay Stock Exchange's Sensitive Index fell 188.91 points, or 1%, to close at 19262.54 after moving between 19242.59 and 19426.30. On the National Stock Exchange, the 50-stock S&P CNX Nifty fell 56.30 points, or 1.0%, to end at 5785.70. Trading volume on the BSE fell to 25.82 billion rupees ($586 million) from Friday's 36.24 billion rupees. Gainers lagged decliners 1,134 to 1,746, while 93 stocks were unchanged.

Mr. Mathews expects Indian shares to remain under pressure due to negative macroeconomic factors such as high crude prices, until software vendor Infosys Technologies kicks off the earnings season Friday. Of the 30 Sensex constituents, 22 ended lower Monday. They were led by Reliance Industries, India's largest company by market capitalization, which fell 1.7% to 1,007.15 rupees.

b) Jim Mueller: How Interest Rates Affect The Stock Market

The first indirect effect of an increased federal funds rate is that banks increase the rates that they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means that people will spend less discretionary money, which will affect businesses' top and bottom lines (that is, revenues and profits).

Therefore, businesses are also indirectly affected by an increase in the federal funds rate as a result of the actions of individual consumers. But businesses are affected in a more direct way as well. They, too, borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as much and will pay a higher rate of interest on their loans. Less business spending can slow down the growth of a company, resulting in decreases in profit. (For extra reading on company lending, read When Companies Borrow Money.)

Clearly, changes in the federal funds rate affect the behavior of consumers and business, but the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock's price, take the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices. When a company is seen as cutting back on its growth spending or is making less profit - either through higher debt expenses or less revenue from consumers - then the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company's stock. If enough companies experience a decline in their stock prices, the whole market, or the indexes (like the Dow Jones Industrial Average or the S&P 500) that many people equate with the market, will go down.

c) M. Hashem Pesaran: Market Efficiency and Stock Market Predictability
It is often argued that if stock markets are efficient then it should not be possible to predict stock returns, namely that none of the variables in the stock market regression should be statistically significant. Some writers have even gone so far as to equate stock market efficiency with the non-predictability property. But this line of argument is not satisfactory and does not help in furthering our understanding of how markets operate.
The concept of market efficiency needs to be defined separately from predictability. In fact, it is easily seen that stock market returns will be non-predictable only if market efficiency is combined with risk neutrality.
When the Fed increases the federal funds rate, it does not have an immediate impact on the stock market. Instead, the increased federal funds rate has a single direct effect - it becomes more expensive for banks to borrow money from the Fed. However, increases in the discount rate also cause a ripple effect, and factors that influence both individuals and businesses are affected.