Factors determining the predictability of stock prices in emerging capital markets: Evidence from Colombo stock exchange
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Date
2013
Authors
Vidanage, T.N.
Dayaratne-Banda, O.G.
Journal Title
Journal ISSN
Volume Title
Publisher
University of Peradeniya
Abstract
Empirical evidence on predictability of stock returns in advanced and emerging capital markets is seemingly mixed. Stock returns in emerging capital markets appear to display weak-form inefficiency. Empirical evidence on the Colombo Stock Exchange (CSE), which is one of the emerging capital markets, has also shown that stock returns tend to display weak- form inefficiency, though factors determining such inefficiency are not well-recognized. This paper, therefore, empirically examines factors determining inefficiency of stock prices focusing on macroeconomic and socio political variables. This study uses time series econometric methods for monthly data from 1985(1) to 2011(5). Results show that there is a long-run relationship between stock returns and macroeconomic variables. Results of Error Correction Model (ECM) and Granger causality tests reveal that there are no such casual links. in the short-run. Socio-political variables all together tend to affect stock price movements. These findings suggest that public information on macroeconomic and socio-political conditions tend to determine stock price movements in the CSE. The empirical results, therefore, indicate that macroeconomic and socio-political variables can, to a considerable extent, be used to predict price movements in emerging capital markets.
Description
Keywords
Efficient market hypothesis , Colombo Stock Exchange , Co-integration , Error Correction Model , Granger Causality test
Citation
Modern Sri Lanka Studies, 2013, IV(1), P 21-51