The Impact of Macro-Economic Variables on Stock Market Performance; Evidence From Sri Lanka

Abstract

Investigations of relationship between macroeconomic factors and performance of stock markets at many emerging economies including that of Sri Lanka are relatively limited on one hand and required to be repeated as the underlying economic settings of such economies have rapidly changed over the years. Post war economic context and subsequent macroeconomic revitalizations in Sri Lanka influenced the performance of capital market of Sri Lanka and hence the investigations on 'how does and at what extent the Sri Lankan stock market responds to such macroeconomic developments?' is an important empirical question. This study thus investigates the relationships between the All share price index of Colombo stock exchange and five macroeconomic variables, namely, Gross domestic product (GDP), Inflation proxied by wholesale price index(WPI) , Interest rate (IR), Balance of payment (BP) and Exchange rate (ER) over the period from 1980 to 2012. Ordinary Least Square (OLS) is used to estimate the parameters of the regression model, with the application of linear, linear-log, log-log and log-linear data transformation for choosing the appropriate model fitting the data. The serial correlation problem was tested using Durbin-Watson statistics. In this study, Durbin-Watson statistics of the log-log model, which had the highest R 2 of 82%, was 1.88 confirming that there was no serial correlation issue. The analysis reveals that macroeconomic variables and the stock market index (All share price index) in Sri Lanka are significantly related. It is observed that the stock market index significantly positively relates to GDP, ER and IR while it negatively relates to inflation proxied by wholesale price index of Sri Lanka. The Balance of payment is found to be insignificant in determining the stock market performance in Sri Lanka __________________________________________________________________________________________

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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(2):151-157 (ISSN: 2141-7016)
151
The Impact of Macro-Economic Variables on Stock Market
Performance; Evidence From Sri Lanka
1
HM.Nijam,
2
SMM. Ismail, and
3
AMM.Musthafa
1
Department of Accountancy and Finance,
2
Department of Social Sciences,
3
Department of Management,
South Eastern University of Sri Lanka
Corresponding Author: HM. Nijam
________________________________________________________________________________________
Abstract
Investigations of relationship between macro-economic factors and performance of stock markets at many
emerging economies including that of Sri Lanka are relatively limited on one hand and required to be repeated
as the underlying economic settings of such economies have rapidly changed over the years. Post war economic
context and subsequent macro-economic revitalizations in Sri Lanka influenced the performance of capital
market of Sri Lanka and hence the investigations on ‘how does and at what extent the Sri Lankan stock market
responds to such macroeconomic developments?’ is an important empirical question. This study thus
investigates the relationships between the All share price index of Colombo stock exchange and five
macroeconomic variables, namely, Gross domestic product (GDP), Inflation proxied by wholesale price
index(WPI) , Interest rate (IR), Balance of payment (BP) and Exchange rate (ER) over the period from 1980 to
2012. Ordinary Least Square (OLS) is used to estimate the parameters of the regression model, with the
application of linear, linear- log, log- log and log- linear data transformation for choosing the appropriate model
fitting the data. The serial correlation problem was tested using Durbin-Watson statistics. In this study, Durbin-
Watson statistics of the log-log model, which had the highest R
2
of 82%, was 1.88 confirming that there was no
serial correlation issue. The analysis reveals that macroeconomic variables and the stock market index (All share
price index) in Sri Lanka are significantly related. It is observed that the stock market index significantly
positively relates to GDP, ER and IR while it negatively relates to inflation proxied by wholesale price index of
Sri Lanka. The Balance of payment is found to be insignificant in determining the stock market performance in
Sri Lanka
__________________________________________________________________________________________
Keywords: macro-economic variables, stock market, Colombo Stock Exchange, All share price index, Sri
Lanka
INTRODUCTION
The stock market mobilizes capital for corporate
sector, the engine of economy, on one hand and on
the other it offers national and international,
individual and institutional investors alternative
investment options for maximizing their return and
wealth. The investors are cautious in the performance
of stock market so that they are prudent in their
investment decisions. Performance of stock market is
normally measured in terms of some composite
market index. The composite market indices are often
considered to signal historical current and potential
performance of the respective stock markets. Though
there have been numerous attempts to develop and
stabilize the stock markets, the emerging economies
are characterized as the most volatile stock markets
(Engel and Rangel, 2005). Moreover, the stock
markets of emerging economies are likely to be
sensitive to various such factors as changes in the
level of economic activities, political and
international economic environment and also related
to the changes in other macroeconomic factors.(Naik
and Padhi, 2012).Investors hence tend to evaluate the
macroeconomics factors that would potentially
significant in determining the capital market
behavior.
The Arbitrage Pricing Theory (APT) is often sought
to provide theoretical background to explain the
relationship between stock prices and
macroeconomic factors (see. Ross, 1976; Chen et al.,
1986). Driven by the theoretical background, there
are various empirical investigations that concluded
that macroeconomic factors are connected to stock
prices or stock market behavior. However, the
finding is not similar in all jurisdictions. Rather, there
exist notable disparities in the direction of movement
and strength of relationship between stock market
indices and macro-economic factors. Naik and Padhi,
(2012) thus observe that the relationship of some
macro factors could vary from market to market; may
change in different sample periods and also in
different frequency of the data thereby more in-depth
studies are needed to understand the macroeconomic
variables that might influence the stock market.
Therefore, the impact of economic factors on stock
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Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(2):151-157 (ISSN: 2141-7016)
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market behavior remains for a long period as a matter
of debate amongst economists, academicians and
professionals,
Though interest in investing in emerging markets has
grown considerably over the past decade (Menike,
2006) while investigations of relationship between
macro-economic factors and performance of stock
markets at many emerging economies are relatively
limited and thereby growing. Menike, 2006 also
claims that although most of the studies were carried
out in emerging market contexts recently, there is
only a little number of studies in emerging Sri
Lankan Stock Market such as of Samarakoon,
(1996,1998,1998), Nimal, (1997), Premawardhana
(1997), Samarakoon et al. (2000).
PROBLEM STATEMENT
Sri Lanka’s capital market has undergone tremendous
changes after the adoption of liberalization policy and
it has been becoming more open to international
investors especially in the contexts of post war
economy and subsequent macro-economic
revitalizations in Sri Lanka. These macro-economic
developments arises a fundamental research question
in the backdrop of Arbitrage Pricing Theory (APT)
and the theory of efficient markets hypothesis
(EMH),whether stock prices in CSE reflected to such
macro-economic developments in Sri Lanka.
Though there are empirical studies in Sri Lanka
investigating the impact of macroeconomic factors on
stock prices or stock market behavior, the findings
may differ when it is repeated with different sample
periods and also in different frequency of the data as
observed Naik and Padhi, (2012).Therefore, the
investigations on ‘how does and at what extent the
Sri Lankan stock market responds to such
macroeconomic developments?’ still remains an open
empirical question. Understanding the
macroeconomic variables that could impact the Sri
Lanka stock market index, with the recent data can be
useful for investors, traders as well as the policy
makers for being prudent on their economic decisions
and actions.
RESEARCH OBJECTIVE
The goal of this study therefore is to test whether the
macro-economic factors in Sri Lanka explain the
behavior of the All Share Price Index (ASPI), which
remains as a composite index of Colombo Stock
Exchange (CSE) for a long period of time. The study
uses annual data for recent 32 years from 1980 to
2012 to investigate the relationship between stock
prices and five macroeconomics variables namely,
Gross domestic product (GDP), Inflation proxied by
wholesale price index(WPI) , Interest rate (IR),
Balance of payment (BP) and Exchange rate (ER) of
Sri Lanka.
It is expected that the finding of this study would
contribute to potential local and foreign investors to
make optimal economic decisions when macro-
economic forces vary. This study would also assist
the policy makers to prudently manage the
macroeconomic forces to optimize the performance
of Sri Lanka’s capital market. The findings in this
study would also extend the existing literature on
relationship between macro-economic factors and
capital market by providing another latest empirical
evidence from an emerging economy.
REVIEW OF LITERATURE
An exhaustive review of literature on the impact of
macro-economic fundamentals over the stock market
behavior is not within the scope of this research.
However, the review of literature to follow will
mainly concern on some resent findings on the
subject under investigation in certain emerging
economies.
Pal & Mittal (2011) investigated the long run
relationship between two Indian capital markets and
some such macroeconomic factors as interest rates,
inflation, and exchange rate and gross domestic
savings using quarterly data from January 1995 to
December 2008 and with the help of unit root test, co
integration and error correction mechanism. They
found that the inflation rate have the significant
impact on both capital markets whereas interest rate
and foreign exchange rate have an impact on one
capital market. It was also found that Gross domestic
saving was insignificant explaining both markets.
Naik and Padhi, (2012) also studied the relationships
between the Indian stock market index (BSE Sensex)
and five macroeconomic variables, namely, industrial
production index, wholesale price index, money
supply, treasury bills rates and exchange rates over
the period 1994–2011 with application of Johansen’s
co-integration and vector error correction model to
explore the long-run equilibrium relationship
between stock market index and macroeconomic
variables. The analysis reveals that macroeconomic
variables and the stock market index are co-integrated
and, hence, a long-run equilibrium relationship exists
between them. It was found that the stock prices
positively relate to the money supply and industrial
production but negatively relate to inflation. The
exchange rate and the short-term interest rate are
found to be insignificant in determining stock prices.
Sulaiman et.al, (2009) studies the impact of
macroeconomics variables on Stock Prices in Karachi
Stock Exchange. They investigated the relationship
with respect to foreign exchange reserve, foreign
exchange rate, industrial production index (IPI),
whole sale price index (WPI), gross fixed capital
formation (GFCF) and broad money M2from 1986 to
2008. The result shows that foreign exchange rate
and foreign exchange reserve are significantly
affecting the stock prices, while other variables like

Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(2):151-157 (ISSN: 2141-7016)
153
IPI and GFCF are insignificantly in explaining stock
prices. Aurangzeb (2012) attempted to identify the
factor affecting performance of stock market in
selected three South Asian countries namely,
Pakistan, India and Sri Lanka using the data from the
period of 1997 to 2010. Regression results indicate
that foreign direct investment and exchange rate have
significant positive impact on performance of stock
market in South Asian countries while; interest rate
has negative and significant impact on performance
of stock market in South Asia. Results also indicate
the negative but insignificant impact of inflation on
stock market performance in South Asia. Ahmed and
Imam (2007) investigatedthe relationship between
stock market and different macroeconomic variables
such as money supply, treasury bill rate, interest rate,
GDP, industrial production index using series of tests
such as unit roots, co integration, and vector error
correction models with the monthly data set for the
period of July 1997 to June 2005 and found that
generally there exists no long run relationship
between stock market index and macroeconomic
variables but interest rate change or T-bill growth rate
may have some influence on the market return.
Chen, et al (1986) examined the effect of selected
macroeconomic variables on stock market returns.
They took short and long term interest rates; expected
and unexpected inflation, industrial production and
the spread between high and low grade bonds. The
data during the period from 1953 to 1972 was taken
and applied 12 cross sectional regression. The study
found that some of these macroeconomic variables
such as industrial production and changes in risk
premium have significant impact on stock returns.
Fang and Miller (2002) identifies the effect of
volatility in Korean foreign exchange market on
Korean stock market with the GARCH-M model and
the daily data of those variables from 3rd of January
1997 to 21st of December, 2000 and they found out
that the Korean foreign currency market impacts in
three different ways on the stock market where the
exchange rate negatively affect stock market returns
while the depreciation volatility positively affects
these returns. They also claim that stock market
return volatility responds to exchange rate
depreciation volatility. Bilson et al. (2001) tested
whether local macroeconomic variables (money
supply, goods prices and real activity) have
explanatory power over stock returns in 20 exchange
emerging markets for the period 1985-1997. The
results indicate that the exchange rate variable is
clearly the most influential macroeconomic variable,
and money supply has greater importance. Ibrahim &
Aziz (2003) explore the relationship between four
macroeconomic variables and Kuala Lampur
Composite Index (KLCI) through co integration and
vector auto regression model. They employ the
monthly data of their variables. Selected
macroeconomic variables were real output, inflation
rate, money supply and exchange rate from 1977 to
August 1998. The study found that there exists a
short term as well as a long term relationship between
the macroeconomic variables and the KLCI. They
further found that two variables such as exchange rate
and money supply were negatively associated with
the stock prices while the other two positively
impacted on the index.
Geethaet al. (2011) the evidence from Malaysia,
United States and China where theyfound that there is
long run relationship between expected and
unexpected inflation with stock returns but there is no
short run relationship between these variables for
Malaysia and USwhile it exists for china. Maysamiet
al. (2004) examined the long-term equilibrium
relationships between selected macroeconomic
variables and the Singapore stock market index (STI),
as well as with various Singapore Exchange Sector
indices which are the finance index, the property
index, and the hotel index. The study concludes that
the Singapore’s stock market and the property index
form co integrating relationship with changes in the
short and long-term interest rates, industrial
production, price levels, exchange rate and money
supply. Al-Khazali (2003) investigated the
generalized Fisher hypothesis for nine equity markets
in the Asian countries as Australia, Hong Kong,
Indonesia, Japan, South Korea, Malaysia, the
Philippines, Taiwan, and Thailand and rejected the
generalized Fisher hypothesis in all countries. The
results of the VAR model indicate inflation does not
appear to explain variation in stock returns; stock
returns do not explain variation in expected inflation.
The stochastic process of the nominal stock returns
could not be affected by expected inflation. The stud y
fails to find either a consistent negative response of
stock returns to shocks in inflation or a consistent
negative response of inflation to shocks in stock
returns in all countries. Momani and Alsharari (2012)
studied the impact of macroeconomic factors on the
stock prices at Amman Stock Market of Jordan
covering the periods of 1992- 2010.The
macroeconomic factors were namely interest rate,
national product, money supply and industrial
product index. The results showed a significant
statistical impact on share prices, but when each
factor wasexamines with the indices, they found that
the interest rate has a statistically significant impact
on the prices of the shares in Amman Financial
Market, and the effect was negative on behalf of the
index and the sectors index. The other variable,
which had a significant impact, was the production
index where its impact was negative for general and
sectors index except the insurance sector, which had
a positive impact.Al-Rjoub (2003) investigated the
effect of unexpected inflation on stock returns in five
Middle East countries as Bahrain, Egypt, Jordan,
Oman, and Saudi Arabia and reported that there is a

Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(2):151-157 (ISSN: 2141-7016)
154
negative and strongly significant relationship
between unexpected inflation and stock returns in the
countries under investigation.Similarly, Coleman
andAgyire-Tetty (2008) explored the impact of some
macroeconomic variables on the performance of
Ghana Stock Exchange with the help of quarterly
time series data for the period from 1991 to 2005 by
using co integration and error correction model. The
findings revealed a weak effect of Treasury bill rates
and on the other hand market take time to respond in
inflation scenario.
Rjoub et al 2009 investigate the performance of the
arbitrage pricing theory (APT) in the Istanbul Stock
Exchange (ISE) on a monthly basis, for the period
January 2001 to September 2005 with six pre-
specified macroeconomic variableswhich are: the
term structure of interest rate, unanticipated inflation,
risk premium, exchange rate and money supply and
unemployment rate. They used OLS technique
observed that there are some differences among the
market portfolios and showed that there are
significant differences among market portfolios
against macroeconomic variables through the
variation of R
2
. Hussainey and Ngoc (2009)
investigate the effects of macroeconomic indicators
(the interest rate and the industrial production) on
Vietnamese stock prices using monthly time series
data covering the period from January 2001 to April
2008. They provide the empirical evidence that there
are statistically significant associations among the
domestic production sector, money markets, and
stock prices in Viet Nam. Another novel finding that
they claim is that the US macroeconomic
fundamentals significantly affect Vietnamese Stock
prices. They also showed that the influence of the US
real sector is stronger than that of the money market.
Gupta and Reid (2013) explore the sensitivity of
industry-specific stock returns to monetary policy and
macroeconomic news. The paper looks at a range of
industry-specific South African stock market indices
and evaluates the sensitivity of these indices to
various unanticipated macroeconomic shocks. The
results from the event study revealed that with the
exception of the gold mining index, where the
consumer price index (CPI) surprise plays a
significant role, monetary surprise is the only variable
that consistently negatively affects the stock returns
significantly, both at the aggregate and sectoral
levels. I addition, the CPI and Producer price index
(PPI) surprises also affect aggregate stock returns
significantly. However, the effects of the CPI and PPI
surprises are quite small in magnitude and are mainly
experienced at shorter horizons immediately after the
shock.Ali(2011) investigates the direction of the
causal relationship between stock prices in Dhaka
Stock Exchange (DSE) and thirteen macroeconomic
aggregates such as the thirteen macroeconomic
variables, viz., consumer price index, deposit interest
rate, foreign exchange rate, export payment, gross
domestic product, investment, industrial production
index, lending interest rate, broad money supply,
national income deflator, foreign remittances and
total domestic credit. The study emplyed unit–root
tests, cointegration and the long–run Granger
causality test for monthly data for the period 1987 to
2010 and found that DSI is any way do not granger
cause CPI, deposit interest rate, export receipt, GDP,
investment, industrial production index, lending
interest rate and national income deflator. But
unidirectional causality is found from DSI to broad
money supply and total domestic credit. In addition
bi-directional causality is also identified from DSI to
exchange rate, import payment and foreign
remittances.
Premawardhana (1997) found a negative relationship
between stock returns and interest rates in Sri Lanka
while in contrast Hassan et al. (2000) found a positive
relationship between such variables. Menike (2006)
investigated the effect of macroeconomic variables
on stock prices in Sri Lankan stock market using
monthly data for the period from September 1991 to
December 2002. The study used employed
multivariate regression where eight macroeconomic
variables were regressed against each individual
stock. The results indicate that higher explanatory
power of macroeconomic variables is high in
explaining stock prices of most of the stock listed in
CSE. The study held that inflation rate and exchange
rate react mainly negatively to stock prices there also
prevails a negative effect of Treasury bill rate
implying that whenever the interest rate on Treasury
securities rises, investors tend to switch out of stocks
causing afall in stock prices. However, lagged mone y
supply variables were held not to have a strong
prediction of the movements of stock prices.
Wickremasinghe (2011) examined the long run
relationship between Sri Lankan capital markets
(CSE) and six macroeconomic variables such as three
month fixed deposit rate, consumer price index, US
stock market index, narrow M1 and GDP of Sri
Lanka. They use the monthly data from January 1985
to December 2004 and with the help of unit root test,
co integration, variance decomposition and error
correction mechanism they found out that there exists
a short term and a long term relationship between
stock prices and macroeconomic variables. Results of
this study also suggest that there exist a Bi-directional
relationship between stock market index and fixed
deposit rate, stock prices and US Share price and
GDP while remaining variables which are consumer
price index, M1 and exchange rate also have casual
bi-directional relationship. Results of variance
decomposition suggest that GDP and M1 play an
important role in longer horizon to forecast variance
in stock prices.

Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(2):151-157 (ISSN: 2141-7016)
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DESIGN AND METHODOLOGY
The study covers the periodsfrom 1980 to 2011 and
employs time series data. Data relevant to this study
was collected from such secondary sources as Central
Bank Annual Reports 1977 – 2012, and Economic and
Social Statistics in Sri Lanka 1990 - 2012. Correlation
and Multiple Regression techniques were primarily
employed for investigating the relationship between
the variables under study. Ordinary Least Square
(OLS) method is used to estimate the parameters of
the regression model. Data analysis was performed
with aid of E-views, Excel, and Minitab statistical
software. The general relationship between All share
price index (ASPI), the dependent variable and such
macro-economic factors, the independent variables as
Gross Domestic Product (GDP), Interest Rate (IR),
Weighted Price Index (WPI), Exchange Rate (ER) and
Balance of Payment (BP) can be represented by a
general linear regression model (1) as below.
Aspi
t
= α + β
1
Gdp+ β
2
Wpi+ β
3
Er+ β
4
Bp+ β
5
Ir+ ei (1)
In order to choose the best regression model that fits
to this time series data, Linear – Log and Log – Log
and log- linearmodels as represented respectively in
mode(2), (3) and (4) were also regressed and
compared.
Aspi
t
= α + β
1
Log Gdp+ β
2
Log Wpi+ β
3
LogEr+ β
4
Log Bp+ β
5
Log Ir+ ei (2)
Log Aspi
t
= α + β
1
Log Gdp+ β
2
Log Wpi+ β
3
LogEr+
β
4
Log Bp+ β
5
Log Ir+ ei (3)
Log Aspi
t
= α + β
1
Log Gdp+ β
2
Log Wpi+ β
3
LogEr+
β
4
Log Bp+ β
5
Log Ir+ ei (4)
The best model was selected based on model
selection statistics namely Adjusted (
2
R
), the
Estimated F statistics (F), Durbin-Watson statistic
(DW) and Variance Inflating Factor (VIF). Table 01
summarizes such key statistics of each model
regressed.
Table 1: Key statistics of ASPI models
Models P F DW VIF R-Sq
(adj) %
linear Aspi
t
= α + β
1
Gdp+ β
2
Wpi+ β
3
Er+ β
4
Bp+ β
5
Ir+
ei 0.000 9.02 0.709135 1.2-2.6 56.4%
linear- log Aspi
t
= α + β
1
Log Gdp+ β
2
Log Wpi+ β
3
Log
Er+ β
4
Log Bp+ β
5
Log Ir+ ei 0.020 4.35 1.81076 1.3-5.6 51.2%
log- log Log Aspi
t
= α + β
1
Log Gdp+ β
2
Log Wpi+ β
3
Log Er+ β
4
Log Bp+ β
5
Log Ir+ ei 0.000 15.60 1.88439 1.3-5.6 82.0%
log- linear Log Aspi
t
= α + β
1
Gdp+ β
2
Wpi+ β
3
Er+ β
4
Bp+
β
5
Ir+ ei 0.000 27.38 0.928762 1.2-2.6 81.0%
Where, GDP = gross domestic product, IR= interest rate, WPI =wholesale price index which proxies inflation,
ER= exchange rate, BP=balance of payment.
RESULTS AND DISCUSSION
Accordingly, log- log model was found to be
relatively sound in consideration of model selection
statistics of Adjusted (
2
R
), the estimated F statistics
(F), Durbin-Watson statistic (DW) and Variance
inflating factor (VIF).Regression results of Log-Log
model are presented in Table 02.
Table 2: Regression Results (Log-Log Model)
Log Aspi
t
= α + β
1
Log Gdp+ β
2
Log Wpi+ β
3
LogEr+ β
4
Log Bp+ β
5
Log Ir+ ei
Coefficient t-value Probability (p)
α -3.416 -2.43 0.033**
Log GDP 1.5196 2.41 0.035**
Log WPI -0.4788 -1.93 0.080*
Log ER 1.9777 4.28 0.001***
Log BP 0.0768 0.63 0.540
Log IR 1.8059 2.25 0.046**
* Significant at the alpha value of 10%
** Significant at the alpha value of 5%
***Significant at the alpha value of 1%
Where, GDP = gross domestic product, IR= interest
rate, WPI =wholesale price index which proxies
inflation, ER= exchange rate, BP=balance of
payment.
Accordingly, ER is positively and significantly
correlated with the estimated coefficient of 1. 9777
indicating that 1% increase in ER will increase ASPI
by 1. 9777, which is relatively higher in magnitude of
impact and in terms of level of statistical significance
(p= 0.001) as compared to other macro-economic
factors under this study. The GDP is positively and
significantly associated with ASPI with the estimated
coefficient of 1.5196 and the p-value of 0.035
whereas IR is also positively and significantly
associated with ASPI with the estimated coefficient
of 1.8059 and the p-value of 0.046. Meanwhile, WPI
is negatively and significantly associated with ASPI
with the estimated coefficient of -0.4788 and the p-
value of 0.080 while BP is not significant in the
model. Therefore in general, it is found that
macroeconomic factors significantly influence the
movement of ASPI, the all share price index, the
prominent parameter of Colombo Stock Exchange.
The direction of movement of ASPI on the account of
macroeconomic variables in this research can be
related to the empirical findings in other jurisdictions.
The evidence confirms that ASPI appears to react
negatively to rising wholesale price index, the
measure for inflation. This finding is consistent with
that of Inter alia Naik and Padhi, (2012), Pal & Mittal
(2011), Menike (2006) ,Al-Rjoub (2003), Panayotis et
al. (1996).The exchange rate is another
macroeconomic variable that critically underpin stock

Journal of Emerging Trends in Economics and Management Sciences (JETEMS) 6(2):151-157 (ISSN: 2141-7016)
156
market performance. This research found a significant
and positive relationship between ASPI and ER. This
finding goes with that of Inter aliaAurangzeb (2012),
Pal & Mittal (2011) ,Suleiman et.al, (2000) and
Aggarwal (1981).ASPI has reactedpositively to rising
of interest rate. This is in contrary to the majority-
held view thatstock market price declines on the face
of increased interest rate as the investors would switch
their investments on treasury bills and fixed interest
carrying investment options. Yet, Hasan et al. (2000)
found a positive relationship between interest rate and
stock return.
CONCLUSION
The findings of the study confirm that there exists a
strongcausality between macro-economic factors and
stock market performance in Sri Lanka. The present
study therefore confirmsthe beliefs that
macroeconomic factors continue to affect stock prices
and the capital market performance. The
improvement of performance of Colombo of stock
exchange is not thus possible without a favorable
macro-economic performance. It is therefore
recommended that in order to maximize the
performance of stock market prudently managed
macroeconomic policies are necessary in which
inflation rate is thoroughly monitored and maintained
at a reduced value as much possible.Upward
movement of GDP, Exchange rate and Interest rate
may lead to better performance of ASPI of CSE.
However, the limitations of the study should not be
over looked. The present study is limited to only five
selected macroeconomic variables and 32 years of
time series data. Inclusion of more variables with a
longer time period may improve the results. A logical
extension of the study can be done by incorporating
more macro-economic variables and other indices of
CSE.
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