Relationship between macroeconomic variables and sectoral indices: evidence from Colombo Stock Exchange
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Date
2024-11-01
Authors
Masrin, M. I. F.
Premarathna, L. P. N. D.
Journal Title
Journal ISSN
Volume Title
Publisher
Postgraduate Institute of Science (PGIS), University of Peradeniya, Sri Lanka
Abstract
A stock exchange is a trading place for buying and selling financial instruments, such as bonds and shares issued by businesses. Sri Lanka’s primary stock exchange is the Colombo Stock Exchange (CSE). There is a lack of information in the literature about the relationship between different sector indices and different macroeconomic variables across longer periods. However, many studies have been conducted in Sri Lanka on the relationship between macroeconomic variables and stock market returns. This study examined the impact of macroeconomic variables on sector indices and identified potential causal relationships between them. Using monthly data from January 2003 to December 2019, statistical techniques such as the Augmented Dickey-Fuller (ADF) unit root test, the Johansen cointegration test, Vector Auto-Regressive (VAR), and Vector Error Correction Model (VECM) were used to examine the relationship between the Money Supply, Inflation Rate, Interest Rate, and Exchange Rate on 18 sector price indices registered at the CSE. The findings indicated that most of the various sector indices of the CSE have a consistent long-term association with the macroeconomic variables of Inflation Rate, Interest Rate, and Exchange Rates. At the same time, there was no short-term relationship between macroeconomic variables and the two sectors of food, beverages and tobacco, and telecommunications. Both the money supply sector and the footwear and textile sector did not show a consistent, long-term equilibrium relationship with other macroeconomic factors and industries. There was no significant relationship between macroeconomic variables and the health care, information technology, bank finance and insurance, and stores and supplies sectors at 10% significance levels. This result is important for policymakers, companies, investors, and other economic actors. Future research may consider different approaches and datasets with varying frequencies, such as weekly and daily, while also adding other macroeconomic variables like industrial production and gross domestic product.
Description
Keywords
Colombo Stock Exchange , Johansen cointegration , Macroeconomic variables , Sector indices , VECM
Citation
Proceedings of the Postgraduate Institute of Science Research Congress (RESCON) -2024, University of Peradeniya, P. 71