Abstract:
The Sri Lankan stock market is highly vulnerable to change in The external factors specifically exchange rate movement and fluctuation make the capital market to become unpredictable for the future implement and achievement in the progress. The Stock prices are affected by many factors such as enterprise performance, dividends, stock prices of other countries, gross domestic product, exchange rates, interest rates, current account, money supply, employment, etc. Economists and researchers have recently been preoccupied by the inter temporal relation between stock returns and exchange rates since they both play important roles in influencing the development of a capital market�s economy in the study, the relationship between exchange rates and Colombo Stock market returns is analyzed. The paper investigates the effects of the exchange rates (USD' GBP, EUR and JPY) and in stock market returns (ASPI and S&PSL) by using monthly time series data in Sri Lanka, over the period of June 2012 to December 2018' This study uses correlation and multiple regression techniques of measuring the relationship between the variables. According to application results, the USD has negative significant relationship with ASPIandS&PSL2O while GBP and JPY have positive significant relationship with SPI and S&PSL20. In contrast, The EUR has negative insignificant relationship with ASPI and s&Psl20.overall, the findings of the study highlighted that the exchange rate volatility is highly associated with another determinant of stock market return volatilitywhere due consideration should be given in making capital market investment decisions.these empirical results also provide Sri Lankan's policymakers a better understanding ofexchange rates and stock market return, to formulate international financial policy in Sri Lanka