Student Research Conference: Academic Year 1994-1995

Brad Comincioli did his honors research with Dr. Robert Leekley on The Stock Market as a Leading Economic Indicator: An Application of Granger Causality.

ABSTRACT: The stock market has traditionally been viewed as an indicator of economic activity. Movements in stock prices are believed to "lead" or forecast the direction of the economy at least to some extent. The basic argument is that stock prices reflect the expected earnings potential, or profitability, of corporations. And because profitability is directly linked to economic activity, fluctuations in stock prices are thought to lead the direction of the economy. Moreover, the fact that stock prices are included as one of the twelve components in the U.S. Index of Leading Economic Indicators suggests that the stock market is accepted to some degree as a forecast of economic activity.

The stock market as an indicator of future economic activity, however, does not go without controversy. Skeptics point to a variety of "false signals" that were given by the stock market as reasons to doubt its forecasting ability. The strong economic growth that followed the 1987 stock market crash is one example in which stock prices falsely led the direction of the economy.

The purpose of this paper is to focus on stock prices as a leading indicator of economic activity and to analyze the "causality" between the two variables. More specifically, time-series analysis and the methodology of "Granger Causality" are used in this project to test "directional" relationships between stock prices and the economy. The notion of "Granger Causality" attempts to answer whether one variable "drives" or "causes" the variation in the second variable. In other words, do stock prices "cause" what happens to the economy, or does the economy "cause" what happens to stock prices?

Niveditha Hasthak did her honors research with Dr. Pamela Lowry on The Effect of Economic Linkages Between Nations on the Co-Movement of Their Stock Markets.

ABSTRACT: This study seeks to determine the extent to which stock market co-movements between pairs of countries reflect the real economic linkages between respective countries. There are many theoretical explanations as to why equity markets in different countries can be expected to move together. It is hypothesized that pairs of nations with greater economic linkages (in the form of bilateral trade flows, cross-border direct investment and bilateral capital flows) will have greater correlations in their stock market prices. This study uses multiple regression analysis on correlation coefficients between pairs of national stock indices. The correlation coefficients are used as a measure of the co-movement of stock prices between two markets. Some of the economic variables used to explain the correlations are the value of bilateral trade, cross border investment and interest rate differentials. The effect of the relative stage of the business cycle the nations are in is also examined. Nine countries are included in the study.

Matthew Jontry did his independent research with Dr. Margaret Chapman on The Effect of Market Size on the Competitive Balance of Major League Baseball.

ABSTRACT: The advent of free agency in Major League Baseball in 1976 and the gradual withdrawal of restrictions on this "freely competitive" labor market has resulted in dramatic increases of player salary levels. The purpose of this project is to test the contention made numerous times by league ownership that this escalation of salaries has a negative impact on the competitive balance of the sport. More specifically, it exploits the total revenue differential between clubs located in big media markets and those located in small media markets. Owners claim that small media market teams cannot possible continue to finance player payrolls at their current levels. These small media market teams will therefore be unable to competitively bid on the top players available through free agency each year and only be able to attract inferior talent. As a result, the competitive balance of the league suffers. A test of the owners' assessment of the problem took the form of three hypotheses. First, since there has been no significant improvement in the competitive balance of Major League Baseball. Second, because of a comparative advantage in annual total revenue generation, big market teams will spend more on their average annual player payrolls than the small market teams. Third, if big market teams are able to spend more than small market teams on labor, they will be able to attract better talent, resulting in more average wins per season than their small market counterparts. A revenue sharing/salary-cap proposal is examined as a measure that would equalize the teams financially. Although a competitive balance problem and significant payroll differences were proven to exist, a direct relationship between revenue and success in terms of wins per season was not conclusively established.

Christopher H. Lewis did his independent research with Dr. Pamela Lowry on International Competitiveness: A Study of the Determinants of Competitiveness.

ABSTRACT: There has been a growing concern, particularly in the United States, over international competitiveness of nations in recent years because of the changing world economy. One major problem faced when studying international competitiveness is its very definition. This study attempts to analyze the determinants of international competitiveness defined as the rising standard of living without encountering balance of payment difficulties. This study employs a time series analysis of six OECD nations in an attempt to determine which components most influence a nation's international competitiveness. It concludes with some implications and areas for future research.

Kara Joy Rocheleau did her honors research with Dr. Robert Leekley on The Effects of High School Mathematics and Science Classes on Wages.

ABSTRACT: The popular press is full of claims that as the world becomes a more technological place, mathematical and scientific knowledge is becoming a necessity, not an extra selling point. There are projections that by the year 2000, almost all jobs will be technical in nature. However, these claims and projections are seldom backed by empirical research. Therefore, this project attempts to fill that gap. If mathematical and scientific knowledge is really essential to the workplace, then people with that knowledge should earn more. Thus, I test if there is a positive correlation between taking an abundance of mathematics and science classes in high school and wages later in life.

I use the Human Capital Model as my theoretical framework. An individual's human capital consists of their acquired productive skills, talents, ability and knowledge. Human capitalists believe that schooling enhances productivity, which in turn increases wages. My research analyzes two samples taken from the National Longitudinal Survey of Youth. The first is a group of individuals that had completed exactly twelve years of education. The second group of respondents had exactly sixteen years of education.

My results show that the human capital factors of previous work experience and age positively affect wages. Further, demographic variables such as having children present in the home or being male also increase wages. My results fail to show that high school mathematics and science classes are more beneficial than other classes. None of my variables that measured the number of classes are significant. The final steps of my research will include looking at the differences between my two samples and examining why my results were not as expected.

Ginny Shull did her honors research with Dr. Michael Seeborg on Division of Labor and the Economic Determinants of Divorce.

ABSTRACT: The theme of the 1992 National Republican Convention rang out with such phrases as the "traditional family" and "family values;" many conservatives asserted that a return to these molds of the established institutions of marriage and family would be the solution to the societal ills America now faces. Using Gary S. Becker's neo-classical theory on the family, this study researches the economic causes of divorce and hypothesizes that, from an economic standpoint, the "traditional family" is more likely to remain intact than a household with a non-traditional family structure. A sample of married couples were drawn from the National Longitudinal Survey of Youth (NLSY), and logistic regressions and descriptive statistics were utilized to measure and explore the economic variables affecting the dissolution of marriages in terms of Becker's theory. Although support was not found for Becker's theory, several economic determinants of divorce were revealed.