"A STUDY TO EVALUATE THE TREND OF LONDON STOCKEXCHANGE IN THE LIGHT OF ITS IMPACT ANDINTERREATIONSHIP WITH SHARE PRICES. Abstract Liquidity can be considered as the lifeblood for the stock market. In a country likeUK, London stock exchange plays a significant role for smooth functioning of thecountry?s economy. Sudden erosion even in a single stock may create massivedisruption in the entire interconnected market worldwide. Despite its constantmonitoring and measurement a considerable amount of risk still exist. Presentstudy has attempt to elucidate the trend or pattern of the market over the last 6years .Times series analysis ( exponential smoothing ), VAR, and auto correlationtest has undergone to estimate the lagand contagion effect in the stock market.During literature review exhaustive analysis illustrates the absence of quantitativedescription about the co movement of the various elements with the London stockexchange. Researcher recognized the problem and assesses it by using differenteconometric tools. Estimation of the interrelation ship among the price of differentof stocks with the overall stock index movement in different time frame is the basicobjective of the research. Unit root hypothesis test is organised to examine theinverse position of the VAR cycle for understanding the position of an investor interms risk return benefits.1 ContentsChapter -1 ..................................................................................................................................................... 51 Introduction ............................................................................................................................................... 51.2 Research Objective ................................................................................................................................ 61.3 Research hypothesis ............................................................................................................................... 61.4 Research question ................................................................................................................................... 71.5 Rationale of the study ............................................................................................................................. 71.6 Structure of the research work ............................................................................................................... 8Chapter-2 .................................................................................................................................................... 11Literature Review ........................................................................................................................................ 112.0 Introduction .......................................................................................................................................... 122.1. The theory of stock market integration and recession. ....................................................................... 142.1.1 Contagion ........................................................................................................................................... 142.1.2 Economic Integration ......................................................................................................................... 142.1.3 Stock Market Characteristics ............................................................................................................. 152.1.4 Core area of the business in London stock exchange group ............................................................. 162.2 Competitive base and environmental challenges ............................................................................... 172.3 Strategy ................................................................................................................................................. 182.3.1 Driving efficiency of the firm ............................................................................................................. 192.3.2 Building scale for future course of action .......................................................................................... 202 2.3.3 Increasing the scope of the firm ........................................................................................................ 202.3.4 Extending the customer reach. .......................................................................................................... 212.4 Area of operation – Segmentation Review ........................................................................................... 222.4.1 Capital market .................................................................................................................................... 232.4.2 Post trade service ............................................................................................................................... 262.4.3 Information and technology services ................................................................................................ 282.5 Principle Risk components and uncertainties ....................................................................................... 30Chapter-3 .................................................................................................................................................... 35Research Methodology ............................................................................................................................... 353.1 Introduction .......................................................................................................................................... 353.2 Concept of research onion .................................................................................................................... 363.3 Research philosophy ............................................................................................................................. 373.3.1 Justification of choosing positivistic research philosophy ................................................................. 373.3.2 Usefulness of this philosophy during analysis of LSE ......................................................................... 373.4 Research Approach selection ................................................................................................................ 383.4.1 Justification of selecting deductive approach .................................................................................... 383.4.2 Usefulness of this approach to assess the trend of LSE. .................................................................... 393.5 Justification of selecting a combination of descriptive research and exploratory research ................ 393.6.1 Usefulness of this method during the assessment of LSE movement over the last 6 years ............. 393.7 Modeling- Data selection ...................................................................................................................... 403 3.7.1 Sample size ......................................................................................................................................... 413.8 Justification behind data selection ....................................................................................................... 413.9 Methodology and Empirical framework ............................................................................................... 41Chapter-4 .................................................................................................................................................... 42Result and Discussion .................................................................................................................................. 424.1Introduction ........................................................................................................................................... 42Chapter-5 .................................................................................................................................................... 62Conclusion and Recommendation .............................................................................................................. 625.1 Introduction .......................................................................................................................................... 625.2 Validation of the objective .................................................................................................................... 625.3 Limitation of the research ................................................................................................................... 635.4 Recommendation .................................................................................................................................. 645.5 Future implication of the research ....................................................................................................... 654 Chapter -11 Introduction The issues of emerging financial market integration have recently attracted theattention of investors and academicians. The liberalization of capital flows facilitatedby recent developments in trading machinery and improved transmission of newshas resulted to increased integration between international financial markets. Thisparticular group deals with the host of international equity, bonds and derivativeproducts (Andersen et.al., 2007). Through its market LSE has deliveredinternational organisation an unrivalled access to Europe?s capital market. Thespillover or contagion effect across financial assets has become the spotlight ofinterest for investor in recent years. London stock exchange is situated practicallyat the heart international financial community. of the international financialAlthough some researcher suggested that financial market integration amongcountries can be weak as development of these markets are predominantly guidedby domestic forces but the fact is that the stock markets become highlyinterdependent with free international capital flows. Melick and Thomas (2007)explained that last time when recession hit UK in 2000-2001 LSE (London stockexchange) went down to 22.7%, SENSEX fell by 14.6% showing a strong sign of comovement. But strength of the Indian economy, market capitalization and structureof capital market has changed by 2008. Aggarwal (2010) mentioned that thecurrent global economic downturn has caused significant fall in the growth rate ofmajor stock markets across the world. Given this interdependency a major area of5 concern is to what extent that can drag along the emerging stock markets like UK?How much the phenomenon of volatility spillover contributes to the co-movement ofthe stock market? Will this crisis or shock cause a permanent increase or decreasein interdependency, or it remains constant? How much of the recessionary impacthas trickle down to domestic economy of UK through stock markets?1.2 Research Objective In the given period while BSE touched its lowest ever figure, before attains itsrecovery, author attempted to assess the following key parameters of the study.? To examine the correlation among the different stocks in the LSE betweenthe year 2006 to 2010.? To estimate the trend of theshare price since 2006? To assess the contribution of shocks due to the variation in the prices ofstock on London stock exchange through Variance Decomposition process.1.3 Research hypothesis Research hypothesis are the assumptions that are formulated on the basis of theliterature review made in chapter-2.Present study has formulated few researchhypothesis that are indispensible for the validity of those assumptions.6 H (Null hypothesis): There exists no association amongst the return series0A among the stock market movement in other countries with London stock exchangegroup H : (Alternative hypothesis): There exists association amongst the return series1A among the stock market movement in other countries with London stock exchangegroup H (Null hypothesis): The variance of the share price in the last 5 years is0B constantH (Alternative hypothesis): The variance of the share price is not constant in1Bthe last 5 years.1.4 Research question ? Is the total stock pricemovement of the organisation in the London stockexchange bears acontagious movement? Is the movement of the stock price in the London stock exchangeis timedependent1.5 Rationale of the studyAjayiet al.(2008) suggested that the reason for the divergent results in the stockmarket is due to the interaction among stock and currency markets. These issuesare sensitive to the stage of the business cycle and having interrelationships with7 "