IMPACT OF MACROECONOMIC VARIABLES ON STOCK MARKET PERFORMANCES: EVIDENCE FROM SRI LANKA

Abstract

After eradicating 30 years of war, Sri Lanka has been rising like a phoenix bird rises from the ashes of its predecessor. With the golden opportunity to experience an impressive development within almost all the sectors inside the country, Colombo stock exchange (CSE) was labeled as the world’s best performing stock exchange according to Bloomberg in 2010. Unfortunately, it did not last longer. According to an analysis of Bespoke investment group in 2012, Colombo stock exchange became the second worst performing stock exchange ahead of Dhaka exchange in Bangladesh.
The aim of this paper is to measure the impact of macroeconomic variables on the all share price index (ASPI) of CSE in Sri Lanka. Monthly data collected from publication of Central Bank of Sri Lanka from 2006 to 2016 were employed. In the model specification, two dummy variables were included to test the impact from civil war prevailed in the country and global financial crisis on share prices and the parameters were estimated using Ordinary Least Square (OLS) method. The results indicate that macroeconomic variables have an overall impact towards ASPI of Sri Lanka. Interest rate, industrial production index and civil war affected negatively on ASPI while US Dollar exchange rate and real GDP growth rate reacted positively on the all share price index. Importantly, global financial crisis positively affected the all share price index in Sri Lanka, which is contradictory to the experiences of developed countries. Study concluded that even though there is an uncertainty prevailing within external world, there is a tendency of attracting foreign investment towards capital market when a country is having a positive condition like Sri Lanka ending thirty years of war. Further, it reveals that inflation rate and money supply growth rate does not have a significant impact on the share price index of Sri Lanka. These findings can be significantly incorporated in government policy making which will be aimed at creating a strong capital market, investment decisions of local and foreign investor, stock market regulating authorities and financial analysts who develop forecasting models with reference to share price indexes.

Keywords: Macroeconomic Impact, Colombo Stock Exchange, All share price index, Ordinary Least Square Method, Sri Lanka