Impact of Macroeconomic Factors on Stock Market Performance of Sri Lanka A Sectoral Approach

Abstract

Colombo Stock Exchange (CSE), Sri Lanka was considered to be one of the topperforming stock markets in the world in recent past (until Dec 2010). After the end ofthe civil war in the country it has attracted a lot of investors and firms during a timeperiod where all the uncontrollable factors like political stability and security concernswere rapidly changing.

The main purpose of this study is empirically investigating the impact ofmacroeconomic factors on emerging stock market of Sri Lanka. Relationships betweenmacroeconomic factors such as Inflation (measured by Colombo Consumer Priceindex), Interest rates, Exchange rates, Gross Domestic Product (GDP), and MoneySupply and stock market performance have been tested using All share Price index(ASPI), Milanka index and five major sector indexes for the period from 2003 to 2010.Relationship between CSE indexes and macroeconomic factors was tested using naturallogarithm values of monthly data and quarterly data. Regression analysis was the highlyused statistical method in this research to find the relationships.

Influence of the macroeconomic factors to the CSE was determined by thecoefficient of correlation r values between CSE index/Milanka index/Sectoral index andeach macroeconomic factor given above. The results of the analysis revealed that theMoney supply and Colombo Consumer Price Index have a major impact over the stockmarket performance. It is further revealed that the GDP and Interest rate also havesignificant impacts, though it is anticipated, that the Exchange rates do not have anysignificant influences over the CSE. Influences of the macroeconomic factors have beenranked according to the strength of the coefficients and their collective influences havealso been considered under the multiple regression analysis.

Key words: Macroeconomic factors, Stock market indexes, Linear regression, Multipleregression