A study on the impact of industrial production index (IPI) to beverage, food and tobacco sector index with special reference to Colombo Stock Exchange

Abstract

This study attempts to explore the impact of Industrial Production Index to sector performance of Beverage, Food and Tobacco in Colombo Stock Exchange Sri Lanka. Secondary data were used for the analysis. Sector index was taken from the Data Library of Colombo Stock Exchange and Industrial Production Index was taken from Annual Reports of Central Bank Sri Lanka. Monthly data were gathered from January 2002 to December 2014. For the time series data set, first, the stationary was checked using Augmented Dickey-Fuller and Phillips Perron Tests of E-views software. The results of stationary check show that the sector index is stationary at 1st difference in both ADF and PP tests. Industrial Production Index is stationary at 2nd difference in ADF test but 1st difference is stationary in PP test. Because of the seasonal trend in IPI 12th difference also considered and it is stationary in both ADF and PP tests. Granger Causality test was used to find out the causal relationship between variables. Results show the one way causality that the changes occurring in IPI will have an effect on changes in sector index. But changes in sector index will not have any effect on changes in IPI. Finally a regression was used to find out the relationship between variables. A Pearson Correlation coefficient was checked to find the correlation among variables before moving to the regression. Result of correlation test shows 84% higher correlation between variables and regression result shows a significant positive relationship amongvariables. The study concludes that Industrial Production Index will positively impact on Beverage, Food and Tobacco sector Index in Sri Lanka. It can be recommended that the changes occurring in the IPI be considered by Investors when they buy and sell stocks in BFT sector.