Correlation matrix of India

Imports (yoy %)

1. Moderate to Low Correlation with Stock Index: The GDP, CPI, Exports (yoy %), and
Imports (yoy %) show moderate to low positive correlations with the stock index,
with coefficients ranging from approximately 0.25 to 0.34. This suggests that while
there is some relationship between these economic indicators and the stock market
performance in your dataset, the relationships are not exceptionally strong. Stock
market performance is likely influenced by a myriad of other factors beyond these
indicators.

2. GDP and Imports (yoy %): The correlation coefficient between GDP and Imports (yoy
%) is relatively high at 0.676404, indicating a strong positive relationship. This
suggests that as the GDP grows, the volume of imports (year-over-year percentage
change) tends to increase as well. This could reflect the increased demand for foreign
goods and services as the economy expands.
 3. Exports and Imports (yoy %): There's a very strong positive correlation between
Exports (yoy %) and Imports (yoy %), with a coefficient of 0.830156. This high
correlation might indicate that countries that export more also tend to import more.
This relationship could be due to the nature of global trade and supply chains, where
countries are both exporting and importing goods as part of integrated trade
networks.

4. GDP and CPI: The correlation between GDP and CPI is slightly negative (-0.145662),
suggesting a very weak inverse relationship in your dataset. This is somewhat
counterintuitive as over long periods, one might expect higher GDP growth to be
associated with moderate inflation (CPI growth). However, the weak correlation
suggests that other factors are at play in determining CPI changes, or it might reflect
short-term variations where GDP growth does not immediately translate to inflation.

5. Insight into Economic Dynamics: The relationships between these variables can
provide insights into the dynamics of the economy under study. For instance, the
positive correlation between GDP and both Exports and Imports (yoy %) suggests an
open economy where trade contributes significantly to economic activity.
Meanwhile, the stock index's correlation with these variables, while positive, is not
very strong, highlighting the complex factors that influence stock market
performance, including investor sentiment, international markets, monetary policy,
and unforeseen events.

This table displays the pairwise correlation coefficients between each of the variables: stock
index, GDP, CPI, Exports (year-over-year % change), and Imports (year-over-year % change).
Positive values indicate a positive correlation, whereas one variable increases, the other
variable tends to increase as well. Negative values indicate a negative correlation, whereas
one variable increases, the other tends to decrease. The values range from -1 to 1, where
values closer to 1 or -1 indicate a stronger correlation, and values closer to 0 indicate a
weaker correlation.

Coef Std.error T stats p>|t| 0.25 0.975

const 31440.00 9498.77 3.310 0.004 11500.00 5140.00
GDP 350.300 483.364 0.725 0.478 -665.209 1365.811
CPI 2600.04 1680.724 1.547 0.139 -931.029 6131.112
IMPORT -38.937 208.780 -0.186 0.854 -477.568 399.694
EXPORT 71.792 175.209 0.411 0.686 -296.129 440.073

The regression output says that the effects of various economic indicators (GDP, CPI, Exports
growth rate, and Imports growth rate) on a dependent variable, presumably the
performance of a stock index. Let's break down the key components of this output and
discuss insights that might not be immediately apparent to AI but are crucial for human
analysis.
stock index GDP CPI Exports (yoy %) \
stock index 1.000000 0.328693 0.305375 0.247740
GDP 0.328693 1.000000 -0.145662 0.349841
CPI 0.305375 -0.145662 1.000000 0.183382
Exports (yoy %) 0.247740 0.349841 0.183382 1.000000
Imports (yoy %) 0.342649 0.676404 0.088684 0.830156

Imports (yoy %)
stock index 0.342649
GDP 0.676404
CPI 0.088684
Exports (yoy %) 0.830156
Imports (yoy %) 1.000000

Interpretation of Regression Output

1. Coefficients: This column shows the estimated change in the dependent variable (stock
index) for a one-unit change in the predictor variable, holding all other predictors constant.
For instance, a 1-unit increase in GDP is associated with a 350.3009 unit increase in the stock
index.

2.Standard Error: Indicates the average distance that the observed values fall from the
regression line. A lower standard error suggests that the coefficient estimate is more precise.

3.t-statistic (t): Used to determine the statistical significance of each coefficient. It is

calculated as the coefficient divided by its standard error. A higher absolute value of t
indicates a higher likelihood that the coefficient is significantly different from zero.

4. P-value (P>|t|): Shows the probability of observing the given result, or one more extreme,
if the null hypothesis (that there is no relationship) is true. A common threshold for
significance is p < 0.05.

5.Confidence Interval ([0.025 0.975]): Provides a range within which the true coefficient
value is likely to fall, with 95% confidence. If this range includes zero, the effect is not
statistically significant at the 5% level.

Analysis:

Const (Intercept) Significance: The intercept is statistically significant (p < 0.05), indicating
that when all independent variables are zero, the stock index has a significant baseline level.
However, this scenario might not be practically meaningful since it's unlikely all economic
indicators would be zero simultaneously.

GDP and CPI Effects: While GDP and CPI have positive coefficients, suggesting a positive
relationship with the stock index, their p-values are above the common significance
threshold (p > 0.05). This means we cannot confidently assert these relationships exist
within the population from which this sample was drawn. It's important to consider the
economic context—GDP and CPI are broad indicators and might have delayed or complex
relationships with stock markets.

Exports and Imports (yoy %) Effects: Despite having theoretically plausible coefficients
(indicating direction of relationship), these variables are not statistically significant (high p-
values). This could suggest that the yearly percentage changes in exports and imports might
not directly impact on the stock index in a straightforward manner, or there could be other
confounding factors not accounted for in this model.

Practical vs. Statistical Significance: Even if a coefficient is not statistically significant, it

doesn't mean it's not important in a real-world context. For example, economic policy
decisions might be influenced by trends in GDP or CPI even if those indicators don't show a
statistically significant relationship with stock market performance in this model.

Model Fit and Variables Selection: This analysis does not directly address the overall fit of
the model (e.g., R-squared value) or whether the included variables are the best set of
predictors for the stock index. It's crucial to consider additional factors, such as market
sentiment, international economic indicators, and sector-specific trends, which might
provide a more comprehensive understanding of stock market movements.

Conclusion:

The regression analysis offers a quantitative assessment of the relationships between

economic indicators and stock market performance. However, the lack of statistical
significance for most predictors suggests that either these relationships are not strong within
this dataset or that additional variables and data are needed for a more accurate model.
Economic analysis, especially of stock markets, requires not just statistical rigor but also a
deep understanding of economic theories, market psychology, and real-world events, which
are aspects.

Granger Causality Test

PIC-2
PIC-1
The Granger causality test is a statistical hypothesis test used to determine if one time series
is useful in forecasting another. In the context of the image , it is used to test if the economic
indicators (GDP, CPI, Exports, and Imports) Granger cause the stock index.

The p-values in the graph represent the statistical significance of the Granger causality test.
A lower p-value indicates that the null hypothesis (that the economic indicator does not
Granger cause the stock index) can be rejected with more confidence.

Based on the pictorial -1, it appears that:

 GDP and Exports have a statistically significant impact on the stock index at the 5%
significance level. This means that past values of GDP and Exports can be helpful in
predicting future values of the stock index.

 CPI and Imports do not have a statistically significant impact on the stock index at
the 5% significance level. This means that past values of CPI and Imports are not
helpful in predicting future values of the stock index, at least not based on this test.

It is important to note that Granger causality does not necessarily imply causation. It simply
means that one time series can be used to predict another. There may be other factors that
influence the stock index that are not captured by the economic indicators in this study.

Pictorial 2:

 Gross Domestic Product (GDP): A strong and growing GDP is generally positive for
the stock market, as it indicates a healthy economy with increasing corporate profits.
Conversely, a weak or declining GDP can lead to a bear market.

 Consumer Price Index (CPI): Inflation, as measured by the CPI, can have a mixed
impact on the stock market. In the short term, rising inflation can sometimes lead to
increased stock prices, as investors seek to hedge against inflation by putting their
money into stocks. However, in the long term, high inflation can be harmful to the
stock market, as it can erode corporate profits and lead to higher interest rates,
which can make stocks less attractive to investors.

 Exports and Imports: Net exports (exports minus imports) can have a positive impact
on the stock market. A country with a trade surplus (more exports than imports) is
seen as having a strong economy, which can boost investor confidence and lead to
higher stock prices. Conversely, a trade deficit (more imports than exports) can be
negative for the stock market.
 variable Lags F-Stats P-Value conclusion
GDP 1 2.1157 0.1621 Not significant
GDP 2 3.0832 0.0761 Significant 10%
GDP 3 2.1802 0.1393 Not significant
GDP 4 1.7021 0.2255 Not significant
CPI 1 0.4915 0.4918 Not significant
CPI 2 0.7353 0.4949 Not significant
CPI 3 0.5141 0.6797 Not significant
CPI 4 0.5177 0.7249 Not significant
EXPORTS 1 0.07791 0.7832 Not significant
EXPORTS 2 1.4330 0.2683 Not significant
EXPORTS 3 1.1141 0.3790 Not significant
EXPORTS 4 1.6660 0.2334 Not significant
IMPORTS 1 0.0032 0.9956 Not significant
IMPORTS 2 2.2878 0.1337 Not significant
IMPORTS 3 1.6369 0.2292 Not significant
IMPORTS 4 2.6371 0.0974 Significant 10%

GDP and Stock Index

 1 Lag: The Granger causality test for GDP at one lag does not show a significant effect
on the stock index, indicating that short-term changes in GDP are not predictive of
stock index movements.

 2 Lags: At two lags, the relationship becomes significant at the 10% level, suggesting
that medium-term changes in GDP might have a predictive power over stock index
movements. This could be interpreted as the stock market taking time to fully
assimilate and react to the economic information embedded in GDP changes.

 3 and 4 Lags: The significance fades again at three and four lags, indicating that the
predictive power of GDP on stock index movements diminishes or becomes less
consistent over longer periods.

CPI and Stock Index

 1 to 4 Lags: For all tested lags, the CPI does not show a significant Granger causal
relationship with the stock index. This indicates that inflation rates, as measured by
CPI, do not have a predictive power on the stock index movements within the tested
lag periods. It could suggest that either the stock market has already priced in
inflation expectations or that CPI changes are not a primary driver of stock market
movements.
Exports and Stock Index

 1 to 4 Lags: Similar to CPI, exports do not show a significant Granger causal

relationship with the stock index at any of the tested lags. This could imply that the
direct impact of export changes on stock market valuations is minimal, or that other
factors not captured in this test have a more significant influence on the stock index.

Imports and Stock Index

 1 Lag: Initially, there is no significant relationship between imports and the stock
index, similar to exports and CPI.

 2 to 4 Lags: Although not significant at conventional levels (5%) for 2 and 3 lags,
there is a borderline significant relationship at the 10% level for 4 lags, suggesting a
delayed stock market reaction to changes in import levels. This could reflect complex
economic dynamics where import changes affect corporate profits and economic
conditions with a delay, eventually influencing stock market valuations.

Overall Analysis as per the outputE

The analysis suggests that among the tested economic indicators, GDP has a somewhat
more pronounced predictive power on stock index movements at medium-term lags, while
CPI, exports, and imports do not exhibit a strong predictive relationship within the tested lag
periods. This could indicate that market participants may react more strongly to broader
economic performance indicators like GDP than to specific inflation rates or trade figures.
However, the significance levels and the absence of a consistent pattern across all lags
suggest that the predictability of stock index movements based on these macroeconomic
indicators is complex and possibly influenced by a multitude of other factors not captured in
this analysis.
USA ECONOMIC INDICATORS IMPACT

CORRELATION MATRIX HEAT MAP

 Stock index: The stock index has a positive correlation with GDP and Exports, and a
negative correlation with CPI. This suggests that a strong economy and increasing
exports are good for the stock market, while inflation is bad for the stock market.

 GDP: GDP has a positive correlation with Exports and a negative correlation with
Imports. This suggests that a strong economy leads to more exports and fewer
imports.

 CPI: CPI has a negative correlation with both Exports and Imports. This suggests that
inflation can lead to decreased exports and imports.

It is important to note that correlation does not imply causation. Just because two variables
are correlated does not mean that one variable causes the other to change. There may be
other factors that influence the relationship between these variables.

Some more indicators.

 The heatmap only shows the correlation between the economic indicators at a single
point in time. The relationship between these indicators can change over time.

 The heatmap does not provide any information about the magnitude of the
correlations. A correlation coefficient of 0.2, for example, indicates a weak
correlation, while a correlation coefficient of 0.8 indicates a strong correlation.
 Correlation matrix of residuals

stock index GDP CPI EXPORT IMPORT

stock
index
GDP

stock index GDP CPI Exports (yoy %) Imports (yoy %)

stock index 1.000000 0.457013 -0.365957 -0.430578 -0.457731

GDP 0.457013 1.000000 0.201344 -0.603469 -0.518503

CPI -0.365957 0.201344 1.000000 -0.340125 -0.318448

Exports (yoy %) -0.430578 -0.603469 -0.340125 1.000000 0.507634

Imports (yoy %) -0.457731 -0.518503 -0.318448 0.507634 1.000000