MACRO ECONOMIC VARIABLES ON STOCK MARKET PERFORMANCE: A CASE OF SRI LANKA

Abstract

Since Sri Lankan economic and political climate has been favourable for after the conclusion of the war, Sri Lanka is now experiencing a high potential environment for development. So it leads to influence on trend of macro-economic variables which also impact on the stockmarket performance. In this context, the aim of the study is to investigate the impact of selected macroeconomic variables namely Gross Domestic Product, Inflation, Interest Rate, Money Supply, Exchange Rate and Balance of Payment on stock market performance of Sri Lanka. To estimate the relationship, unit root test and Regression Model have been used. The study is carried out in Sri Lanka from 2004 to 2015 in quarterly basis. The result of regression model suggests that stock market performances are significantly affected by the macro-economic variable, not only macroeconomic variables but also other factors to determine the stock market performance. Based on estimated regression coefficients it is found that interest rate has a significant negative influence on stock market performance and balance of trade have positive significant relationship with the stock market. It indicated that favorable balance of trade induces the interest of foreign investors to invest the stock market in Sri Lanka. In addition, gross domestic product and exchange rate are negatively related to stock market, but it is not significant in the model. On the other hand, money supply and inflation are positively associated to stock prices although not significant.