Abstract:
The purpose of this study is to investigate the effect of macroeconomic variables on
stock prices in the Sri Lankan stock market. The relationship between stock prices and
macroeconomic vary is well documented for Sri Lanka and other major economies. The
monthly data on inflation rate, interest rate, money supply, exchange rate and stock
price are taken from the period of January 2005 to June 2018. The correlation and
multiple regression analysis were used to determine whether there was a statistically
significant relationship between stock market prices and macro factors as an
independent variable. The alternative hypothesis which states that selected macroeconomic variables are impacting on stock price accepted at 0.05 level of significance
in all stocks. The results showed that the higher R Square value is 86%, which justifies
higher explanatory power of macroeconomic variables in explaining stock prices. The
findings revealed that money supply, inflation rate and exchange rates had a significant
positive effect on stock market returns; however, interest rates had a significant
negative effect on stock market returns. Have verified the findings of this research,
combined with the actual situation of Srilankan's economic development process and
then analyze and discuss the feasibility of high specific policy proposals, such as policy
formulation in line with current inflation and future trends, respect for objective facts
and reasonable policies to improve investment decisions, thus increasing the net worth
of this economy in Sri Lanka.
