Contribution of macroeconomic factors on the stock market performance in Sri Lanka

Abstract

The main aim of this research study is to analyze the connections that exist amongst the all share price index of Colombo Stock Exchange (CSE) and four major macro economic factors: Inflation, Exchange Rate, Money Market Rate and Money Supply of Sri Lanka. To study this research the data were collected monthly basis from January 2001 to December 2011 time periods. Co-integration analysis for macro economic factors and all share price index of stock market were carried out to test for the existence and Vector Error Correction Model (VECM), indeed extent of the co-movement that is evident of co-integration can be viewed as the statistical expression of the nature of equilibrium relationships, with co-integrated variables sharing common stochastic trends. The Johansen co-integration test and VECM and its estimation procedures are discussed in this paper Long and short run relationships exist among the Stock price index and macroeconomic variables. The results of the study will aid us to gain insight into how all share price index of CSE of Sri Lanka co-integration contributes to portfolio diversification strategy. The results have implication for investors, both domestic and international.