IMPACT OF MACRO ECONOMICS VARIABLES ON STOCK PRICES IN SRI LANKAN ECONOMY
Abstract
This study examines critically the long-run macroeconomic determinants of stock market performance
in Sri Lanka between 1996 and 2011. The properties of the time series variables are examined using the
Augmented Dickey-Fuller unit root test and most of the incorporated variables in the study were found
to have a unit root at level. The Johansen Cointegration test and Ordinary Least Square test results
revealed that the stock market performance in Sri Lanka is mainly determined by macroeconomic forces
in the long-run. However, the empirical analysis showed that the Colombo Stock Exchange all share
price index is more responsive to changes in Real Gross Domestic Product, inflation rate, Interest Rate,
Exchange Rate, and Broad Money Supply. While, the entire incorporated macroeconomic variables
were found to have simultaneous and significant impact on the Sri Lankan capital market performance
in the long-run. The study recommended that investors should pay close attention to Real Gross
Domestic Product, inflation rate, Interest Rate, Exchange Rate, and Broad Money Supply in the long
run in their investment decision.
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