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Impact of Macroeconomic Variables on Stock Market Performance in Sri Lanka

Wanigasuriya, W.M.T.J.


The aim of this paper is to investigate the impact of macro-economic variables on stock market performance in Sri Lanka. This study employed All Share Price Index (ASPI) as a proxy to represent the stock market performance and inflation, interest rate, exchange rate, foreign direct investment, gross domestic product and broad money supply were used as the macro economic variables. Secondary data was collected for the period of 1997 to 2019. Autoregressive Distributed Lag (ARDL) Bound test procedure was adopted to investigate the effects of macroeconomic determinants on ASPI and to investigate the existence of a cointegration among the variables. Error Correction representation of ARDL mechanism is adopted to determine the short run dynamics relationship between the variables and long run adjustment of the model. The study showed that there is a long and short run relationship exist among the ASPI and macro-economic variables. Gross Domestic Product has significantly and positively impact on ASPI in the long run while current value of GDP does not affect ASPI in the short run. In contrast, past value of GDP affect ASPI negatively in the short run. Further there is a negative relationship between M2 and ASPI in the long run while positive correlation between these two variables in the short run. The findings of this paper will hold practical implications for stock market analysts, investors and policy makers.


KEYWORDS: ASPI; Macro economic variables; Sri Lanka