Impact of Macroeconomic Variables on Stock Market Performance in Sri Lanka

Abstract

Introduction :

The stock market in any country leads to economic growth and development of that nation since it mobilizes the domestic resources in the country and leads them to productive investments. After the liberalization in 1977, the financial market in Sri Lanka was developed to a greater extent. The Colombo Stock Exchange (CSE) is a major part of the financial market in Sri Lanka. It has 290 companies representing 20 businesses sectors as at 30 June 2019, with a market capitalization of Rs. 2523.38 Bn. CSE has two main price indices, All Share Price Index (ASPI) and Standard and Poor’s Index (S & P SL 20). These index values are calculated on an ongoing basis during the trading session. ASPI measures the movement of share prices of all listed companies. ASPI recorded a decreasing trend in Sri Lanka from 1997 to 2000 while it shows an increasing pattern from 2000 to 2005. However, fluctuations can be seen in the ASPI from 2010 to 2020 (Source: https://www.cse.lk/pages/market-capitalization/market-capitalization.html).

The performance of the stock market in any country depends on various macro-economic factors. Menike (2006) found a negative relationship between Treasury bill rate and stock market prices. Badullahewage and Jayawardenepura (2018) found that exchange rate and Gross Domestic Product have a positive relationship with ASPI. Addy et al. (2014) identified the relationship between macro-economic variable in Ghana stock exchange which revealed that there is a long run relationship between some of the macro economic variables and the stock market. Caroline et al. (2011) studied the relationship between stock market, expected inflation rate, unexpected inflation rate, exchange rate, interest rate and GDP in the case of Malaysia, US and China. They suggest that these variables have a significant impact on stock market performance in the long run.

Several studies have been carried out to examine the relationship between macro-economic variables and stock market performance. But, there are no in-depth studies that investigate the association between macro-economic variables and stock market performance in the context of Sri Lanka. Thus, this study attempts to bridge this gap by examining the connection between macro-economic variables and stock market performance in order to draw economic policy implications and to have a proper understanding of the stock market in Sri Lanka and its subsequent status.