Abstract:
The stock market plays a vital role in all economies. In 2010, the
Colombo Stock Exchange became the second-highest performing
stock market in the world as many domestic and foreign investors
invested in the Sri Lankan stock market with the end of the war.
However, it has created a market bubble and no significant
improvements reported since mid-2011. Further, the determinants
of share market performance remain unclear. It is generally
apparent that macroeconomic factors cause a sound impact on
stock market performance. Thus, this study attempts to identify
the causal relationship between share prices and the four major
macroeconomic factors in the Sri Lankan economy. The
dependent variable was the All Share Price Index (ASPI). Real
gross domestic product (RGDP), Money supply (M2b), Balance of
trade (BOT) and Net foreign investment (NFI) were the
independent variables. Monthly data was used for 10 years
spanning from January 2009 to December 2018 for all variables.
Monthly bulletins of the Central Bank of Sri Lanka and the
Colombo Stock Exchange data library were used to get data.
Stata13, the statistical software was utilized to analyze the data.
Descriptive analysis, correlation analysis, regression analysis,
Johansen co-integration test and Vector Error Correction Model
(VECM) were employed to identify how macroeconomic factors
impact share prices. There was a co-integration between the
dependent and independent variables. The study revealed that
there was a long-run causality between the performance of the
capital equity market and macroeconomic variables and the longrun equilibrium could be reached at a speed of 13.90%. Empirical
results disclose that M2b and BOT had a positive impact on the
ASPI. However, NFI had a negative influence on the ASPI. All
variables significantly impacted ASPI except RGDP. The results
of the study may help policymakers, investors, and other
professionals to make proper decisions.
