The Application Of Multivariate Statistical Techniques In The Analysis Of Stock Market Data

Securities were first traded in the sixteenth century and it is reasonable to assume that si~ce that time investors have always devoted attention to research into the relative merits and demerits of individual stock market ventures. In the nineteenth and twentieth centuries, ma~ has placed increasing emphasis on numerical and statistical analysis, and it was only a matter of time before these two related approaches focussed their attention on the problems of stock market research. As early as 1900, a Frenchman, Louis Bachelier, published a paper (Bachelier (1900)) which was to be the forerunner of a vigorous, and as yet unresolved, debate on what has come to be called "the random walk model of stock market prices," or "the efficient market hypothesis. 11 Unfortunately, in the year 1900 Bachelier's paper produced little response, and interest .in the model waned until the late 1950's and early 1960's when it was rediscovered and empirically examined by researchers such as Osborne, Mandelbrot, Cootner and Fama. Their work, together with that of other researchers such as Markowitz and Sharpe, sowed the seed of interest and the last fifteen to twenty years have seen an ever in-1. 2 creasing interest in what can possibly be called Mathematical and Statistica l Stock Market research. Tuttle and Jones (1975) conclude: In fact, as Latane, "the modern computer, magnetic data banks, and other new quantitative tools are producing an information revolution i n security analysis. New computerbased information systems provide a clear opportunity to make security analysis and portfolio management more of a science than an art." In this thesis, some of the many aspects of stock market behaviour whi ch can be investigated using statistical analysis, are examined. At the outset it must be stated that a comprehensive examination of all possible area~ in which statistical analysis can be used is not attempted. Instead, the thesis comprises of a few different, independent studies, which arose from the consideration of some basic questions concerning the behaviour of stock market prices. For this reason, the reader should not place much emphasis on the order in whic? the chapters appear as each chapter can be considered a separate entity. However, for convenience the thesis may be divided into two halves. The first half (Chapters 2, 3 -and 4) deals with the construction and analysis of stock market indices, while the second half (Chapters 5, 6, 7 and 8) deals with the analysis of stock market securities and their prices.