Application of PCA for identification of factors driving stock prices & relationship of predictions with CAPM model

Abstract

This project seeks to determine what factors could be broadly influencing the stock prices of selected companies belonging to a given sector of operation, and how they can be utilised to predict whether excess returns could be obtained in the particular stock in the near future. It has been inspired by recent studies carried out in this sector, such as those focusing on empirical asset pricing and behavioural finance. In India in particular, investors’ behaviour is a key influence on stock prices, and with the citizens becoming more financially literate by the day, the annual financial results declared are observed keenly to analyse current & future valuations & performances of stock prices. Momentum of the stock has also been historically known to be a motivator for investors to stay put or enter a booming bull market or exit a market which is seemingly progressing towards a bear scenario. This project seeks to determine what factors could be broadly influencing the stock prices of selected companies belonging to a given sector of operation, and how they can be utilised to predict whether excess returns could be obtained in the particular stock in the near future. It has been inspired by recent studies carried out in this sector, such as those focusing on empirical asset pricing and behavioural finance. In India in particular, investors’ behaviour is a key influence on stock prices, and with the citizens becoming more financially literate by the day, the annual financial results declared are observed keenly to analyse current & future valuations & performances of stock prices. Momentum of the stock has also been historically known to be a motivator for investors to stay put or enter a booming bull market or exit a market which is seemingly progressing towards a bear scenario.