Question

QUESTION 1 (30) Write a literature review on determinants of stock market performance. (Maximum length 2000 words) The literature review should include the following follows, firstly, literature on stock predictions using different financial variables. This should be followed by literature on under and over reaction to information events in stock markets, literature on CAPM and Fama and French models (Chinese Stock Exchange Market evidence).

Answer 1

Literature review on determinants of stock market performance:

1. Generally, the determinants of stock market performance are economic growth, banking sector, foreign direct investment, inflation, savings, bank rates, etc. These variables have a positive impact on stock market liquidity. In the future, they can be used to predict the market performance of the stock and how much they got influence with these variables.

2. Due to overreaction to information events in stock markets, there are bubbles and crashes in the market. the person is a rational thinker. so if he knows about the information of the market, behavioral finance will come into the picture thus making the under reaction to the investor. This is like an anchoring idea to the investor.

3. CAPM, Fama, and French Models are a three-tier model. It can predict when there is a big variation in the return of the portfolio. In this model, there is restricted liquidity, which makes it a poor model. However, this asset pricing model are used to make budget decisions, determining the cost of capital. And as a result, the use of these models is increasing day by day. In the end, the main of the investor is to use the well-defined models to maximize its expected returns.