Abstract:
The purpose of this study is to investigate the effect of macroeconomic variables on stock prices in
the Srilankan stock market. The relationship between stock price and macroeconomic vary is well
documented for Sri Lanka and other major economies. The monthly data on the inflation rate,
interest rate, money supply, exchange rate and stock price are taken from the period of January
2006 to June 2019. 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 the 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.
