Economic Activity And McDonalds Stock Prices

Wagner, Wasserman, Smith and Carpenter

The efficient markets hypothesis states that all stock prices represent their fundamental value at
each point in time. Further, it maintains that the stock market runs perfectly informed. If this
hypothesis were true, then any new information which may substantially affect the value of a
companys stock is already seen in its price. It also must be true that at any given time the price of a
companys stock represents the overall value of the company. Building on this hypothesis, we want to
use the price of stock for the McDonalds Corporation to evaluate the impact of economic fluctuations
have on the value of McDonalds.
Our original model controlled for the national savings level, the consumer price index, the
political affiliation of the current president, and the level of the S&P 500. We have also decided to test
the impact the movie Super Size Me had on the stock price of McDonalds. To do this we declared an
event dummy for all dates after the year 2004, setting the value to 0 prior to 2004 and to 1 after 2004.
We have also decided to add the unemployment rate to measure the effect fluctuations in income had
on the stock prices. Lastly, we added Kroger's stock price because of the assumed substitution between
groceries and going out to eat. That is to say, people go out to eat more often when their disposable
income increases.
Testing Our Model
Using the Ramsey reset test, we reject the hypothesis that all nonlinearities are accounted for
with 99.99% confidence. We would also suspect that there are important omitted variables. The
Davidson Mackinnon test was performed by creating a second model with quadratics for the CPI,
unemployment and savings rate. As the level of these variables increase, we would suspect that the
level of fast food consumption will increase because of a decrease in hours of leisure or some other

pertinent effect on real wages. The tests results are conducive to our suspicions with the original model
being rejected with 99.99% confidence.
Because of an issue with larger than expected standard errors on our initial regression, we
found that our data could be defunct. But, instead of abandoning the project we decided to use the
Davidson-Mackinnon test to determine whether or not the data was salvageable. After reviewing the
findings, we decided that a new model using the natural logs of real GDP, savings, and unemployment
would be our preferred model. The model we will use will be:
MCD = 0 + 1(S&P500) + + 6 (KROGERSTK) + 7 (TRENDVAR) + 0 (POL) + 1 (SUPRSIZEME) + u
= [2 (LNSVG) +3 (LNUNEMP) + 4 (CPI) + 5 (LNRGDP)]
There are possible issues concerning endogeneity; that if we were to address it in our model,
could bolster its precision. Specifically, but not limitedly: a measure for a change in transfer payments,
such as unemployment insurance extensions during economic downturns, the average hours that each
person in the labor force is working each month this would control for the amount of leisure that is
available in the workforce, and the consumer confidence level this would control for changes in
discretionary spending due to a households view of current economic health. Another control that
might lead to more accurate depiction of the behavior would be to move the GDP data ahead to
determine if the information has on the general public.
The Breusch-Pagan test for heteroskedasticity showed that our model is, in fact,
heteroskedastic. To account for this problem, we will use robust standard errors to maintain a relevant
level of statistical significance. Also, we converted some of our variables into logs to help alleviate the
heteroskedasticity.

Regarding multicollinearity, our model does not show any significant signs that lead us to
believe that there are any concerns. Our variables seem to be independent enough of each other to
suggest that the multicollinearity problem is null.
Results
We expected that the S&P 500 variable would have a positive coefficient and it does. Its
coefficient is statistically significant and economically significant, because a one-dollar increase in the
S&Ps stock value explains a $.05 increase in Mc Ds stock. An explanation for this could just be that,
paired with the fact that saving is down; there has been an increase in spending, not just for McDonalds,
but for everything in general. And as we expected, the sign of ln(savings) was negative and it is also
statistically significant and economically significant because for every dollar that is saved, McDonalds
loses $.60 in their stock price. The dummy variable for political partys coefficient was negative.
Although the political party coefficient is not statistically significant, it is economically significant, thus,
when Republicans are in office, McDonalds stock decreases by $1.19. Our ln(unemployment) variable is
both statistically and economically significant. An increase in the unemployment rate leads to a 65%
increase in stock price.
We expected the coefficient of the event dummy variable for before or after the production of
the movie Super Size Me to be negative. In fact it is actually positive. It is both statistically and
economically significant, which lead to an increase in McDonalds stock by $6.67. We were correct about
Krogers stock coefficient because it is negative, but it is not economically nor statistically significant. As
for our last variable, the CPI, it is negative, not like we assumed it would be. CPI is not statistically
significant, but it is economically significant because an increase in stock prices lead to an increase in
stock price of $0.39, which is a huge change.
Conclusion

Understanding these key variables shows us the effect that key economic factors have on the
price of McDonalds stock. We saw that almost all the variables had a significant effect on the price of
McDonalds stock, but a few statistics not accounted for in the beginning could explain this. For
example, we did not look at the variability of the stock of McDonalds, not did we look at the standard
deviation of the restaurants stock data. A high variability can lead to what could be perceived as
significant changes; also the standard deviation could give us more insight into the idea of economic
significance. All in all, the stock prices generally showed a tendency to perform well when the economy
is spending money or just beginning to cut back because of an increase in unemployment. More study is
of course needed, but due to the fact that our data and findings still have room for analysis, this
regression is inconclusive.

APPENDIX
. regress
MCD sp500 lnSVGS lnRGDP POL SUPRSZME lnunempl SSE > KROGERSTK CPI var14
Source |
SS
df
MS
-------------+-----------------------------Model | 5004.13922 12 417.011602
Residual | 202.287494 23 8.79510845
-------------+-----------------------------Total | 5206.42672 35 148.755049

Number of obs = 36
F( 12, 23) = 47.41
Prob > F = 0.0000
R-squared = 0.9611
Adj R-squared = 0.9409
Root MSE = 2.9657

-----------------------------------------------------------------------------MCD
|
Coef.
Std. Err.
t P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------sp500
| .0580555 .014651 3.96 0.001 .0277476 .0883635
lnSVGS
| -139.4984 36.08208 -3.87 0.001 -214.1399 -64.85692
lnRGDP | 99.54638 197.9328 0.50 0.620 -309.9088 509.0015
POL
| -1.190918 3.711364 -0.32 0.751 -8.86846 6.486623
SUPRSZME | 6.664474 3.135973 2.13 0.045 .177219 13.15173
lnunempl | 65.70522 13.91697 4.72 0.000 36.91577 94.49467
KROGERSTK | -.0935521 .319795 -0.29 0.772 -.7550984 .5679942
CPI
| -.3920476 .609201 -0.64 0.526 -1.652276 .8681806
var14
| 3.517009 1.323342 2.66 0.014 .7794684 6.25455
_cons
| -201.2886 1599.537 -0.13 0.901 -3510.184 3107.606
-----------------------------------------------------------------------------. predict yhat
(option xb assumed; fitted values)
(276 missing values generated)
. regress
MCD sp500 SVGS RGDP SVGSsq RGDPsq POL SUPRSZME UN
> EMPL unemplsq SSE KROGERSTK CPI var14 yhat
Source |
SS
df
MS
Number of obs = 36
-------------+-----------------------------F( 16, 19) = 77.95
Model | 5128.29826 16 320.518641
Prob > F = 0.0000
Residual | 78.1284558 19 4.11202399
R-squared = 0.9850
-------------+-----------------------------Adj R-squared = 0.9724
Total | 5206.42672 35 148.755049
Root MSE = 2.0278
-----------------------------------------------------------------------------MCD |
Coef.
Std. Err.
t
P>|t| [95% Conf. Interval]
-------------+---------------------------------------------------------------sp500
| .2934654 .1389335 2.11 0.048 .0026742 .5842567

SVGS
| -.6065174 .2410394 -2.52 0.021 -1.111019 -.102016
RGDP
| -.0572657 .1146206 -0.50 0.623 -.2971694 .1826381
SVGSsq | .0000647 .0000225 2.87 0.010 .0000176 .0001119
RGDPsq | 4.47e-06 4.59e-06 0.97 0.343 -5.14e-06 .0000141
POL
| -8.690724 3.972973 -2.19 0.041 -17.00625 -.3751946
SUPRSZME | 32.13149 15.63001 2.06 0.054 -.5825094 64.84548
UNEMPL | 122.1611 54.30682 2.25 0.037 8.495589 235.8265
unemplsq | -5.356118 2.723134 -1.97 0.064 -11.0557 .3434676
KROGERSTK | .0033529 .4160976 0.01 0.994 -.8675493 .8742552
CPI
| -3.344627 1.145695 -2.92 0.009 -5.742594 -.9466603
var14
| 17.62712 8.316956 2.12 0.047 .2195332 35.03471
yhat
| -4.77735 2.376021 -2.01 0.059 -9.75042 .1957195
_cons
| -331.1084 962.6046 -0.34 0.735 -2345.863 1683.646
-----------------------------------------------------------------------------. regress
MCD sp500 lnSVGS lnRGDP POL SUPRSZME lnunempl
> KROGERSTK CPI var14
Source |
SS
df
MS
Number of obs = 36
-------------+-----------------------------F( 12, 23) = 47.41
Model | 5004.13922 12 417.011602
Prob > F = 0.0000
Residual | 202.287494 23 8.79510845
R-squared = 0.9611
-------------+-----------------------------Adj R-squared = 0.9409
Total | 5206.42672 35 148.755049
Root MSE = 2.9657
-----------------------------------------------------------------------------MCD |
Coef.
Std. Err. t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------sp500
| .0580555 .014651 3.96 0.001 .0277476 .0883635
lnSVGS
| -139.4984 36.08208 -3.87 0.001 -214.1399 -64.85692
lnRGDP
| 99.54638 197.9328 0.50 0.620 -309.9088 509.0015
POL
| -1.190918 3.711364 -0.32 0.751 -8.86846 6.486623
SUPRSZME | 6.664474 3.135973 2.13 0.045 .177219 13.15173
nikki225
| .0009418 .0005102 1.85 0.078 -.0001137 .0019973
euronex100 | -.0089089 .0041389 -2.15 0.042 -.0174708 -.000347
lnunempl | 65.70522 13.91697 4.72 0.000 36.91577 94.49467
SSE
| -.0001147 .0009208 -0.12 0.902 -.0020195 .0017902
KROGERSTK | -.0935521 .319795 -0.29 0.772 -.7550984 .5679942
CPI
| -.3920476 .609201 -0.64 0.526 -1.652276 .8681806
var14
| 3.517009 1.323342 2.66 0.014 .7794684 6.25455
_cons
| -201.2886 1599.537 -0.13 0.901 -3510.184 3107.606
-----------------------------------------------------------------------------. ovtest
Ramsey RESET test using powers of the fitted values of MCD
Ho: model has no omitted variables

F(3, 20) =
Prob > F =

3.45
0.0362

. tsset var14
time variable: var14, 1 to 116
delta: 1 unit
. dfuller MCD
Dickey-Fuller test for unit root

Number of obs =

115

---------- Interpolated Dickey-Fuller --------Test

1% Critical
5% Critical 10% Critical
Statistic
Value
Value
Value
-----------------------------------------------------------------------------Z(t)
-2.875
-3.505
-2.889
-2.579
-----------------------------------------------------------------------------MacKinnon approximate p-value for Z(t) = 0.0483
. dfuller MCD ,trend
Dickey-Fuller test for unit root

Number of obs =

115

---------- Interpolated Dickey-Fuller --------Test

1% Critical
5% Critical 10% Critical
Statistic
Value
Value
Value
-----------------------------------------------------------------------------Z(t)
-3.299
-4.035
-3.448
-3.148
-----------------------------------------------------------------------------MacKinnon approximate p-value for Z(t) = 0.0664
. regress
MCD sp500 lnSVGS lnRGDP POL SUPRSZME nikki225 euronex100 lnunempl SSE
> KROGERSTK CPI var14
Source |
SS
df
MS
Number of obs = 36
-------------+-----------------------------F( 12, 23) = 47.41
Model | 5004.13922 12 417.011602
Prob > F = 0.0000
Residual | 202.287494 23 8.79510845
R-squared = 0.9611
-------------+-----------------------------Adj R-squared = 0.9409
Total | 5206.42672 35 148.755049
Root MSE = 2.9657
-----------------------------------------------------------------------------MCD
| Coef.
Std. Err. t
P>|t| [95% Conf. Interval]
-------------+---------------------------------------------------------------sp500
| .0580555 .014651 3.96 0.001 .0277476 .0883635
lnSVGS
| -139.4984 36.08208 -3.87 0.001 -214.1399 -64.85692
lnRGDP | 99.54638 197.9328 0.50 0.620 -309.9088 509.0015

POL
| -1.190918 3.711364 -0.32 0.751 -8.86846 6.486623
SUPRSZME | 6.664474 3.135973 2.13 0.045 .177219 13.15173
lnunempl | 65.70522 13.91697 4.72 0.000 36.91577 94.49467
KROGERSTK | -.0935521 .319795 -0.29 0.772 -.7550984 .5679942
CPI
| -.3920476 .609201 -0.64 0.526 -1.652276 .8681806
var14
| 3.517009 1.323342 2.66 0.014 .7794684 6.25455
_cons
| -201.2886 1599.537 -0.13 0.901 -3510.184 3107.606
-----------------------------------------------------------------------------. durbina
Durbin's alternative test for autocorrelation
--------------------------------------------------------------------------lags(p) |
chi2
df
Prob > chi2
-------------+------------------------------------------------------------1 |
2.274
1
0.1315
--------------------------------------------------------------------------H0: no serial correlation