Second Regression Model
S&P500 (Annual Average) = β0 + β1 * (Annual CPI) + β2 * (Annual Average House Price Index) + β3 * (Annual Average Interest Rate) + β4 * (Average Annual Unemployment Rate) + β5 * (Annual Average GDP of US) + β6 * (Annual Average GDP of Germany) + β7 * (Annual Average GDP of China) After we run the regression of the second model, it resulted in improving of our model accuracy. We excluded PPI, GDP of Spain because it came out that these variables have no impact on the US stock market. Also, we added the unemployment rate and GDP of China because it is the largest US business partner.
Explanation of the new variables
Unemployment Rate is one of the most important factors of the economy’s performance. High unemployment rate decreases the buyer power of the consumers. 2/3 of the US economy is consumer based and it influences the stock market negatively. We assume that there is a relationship between these two variables.
Gross Domestic Product of China affects the US economy because cheap export from China prevents inflation in the US. China is a huge buyer of the US Treasuries. It lowers the interest rate and companies borrow money to invest in development hence, it directly affects the stock market. We assume that GDP of China and US stock market move in the same direction, meaning if China does well, it has money to buy US Treasuries. Additionally, the US stock market increases because production of those US companies that is outsourced to China grows.
Suppose you have applied for a business analyst position at a prestigious firm and as part of their hiring process, you have been requested by the Recruitment Panel to analyze the data for a presentation to be made to the Panel.
Prepare a report that summarizes your analysis, including key statistical results, conclusions and recommendations. Your report must also include a complete analysis and clear interpretation of each one of the coefficients contained in the two studied models. Include any technical material that you feel is appropriate in the appendix