Abstract:
This research aims to understand the effect of macroeconomic factors on the
performance of the share market, which would attract the attention of economic
policymakers in terms of enhancing investments within Sri Lanka. The study
followed positivism research philosophy and applied deductive research approach.
Thereby we used quantitative data to reach conclusions. The study derived two
macroeconomic factors based on the key macroeconomic variables by using
Principal Component Factoring: Economic Growth Factor and Time Value of Money
Factor for the analysis. Based on the monthly data collected for 213 months from
January 2002 to September 2019, the study developed GARCH (1,1) model to
understand the time-series impact of the macroeconomic factors on the All-Share
Price Index. The results of the GARCH (1,1) model revealed that the All-Share Price
Index of the previous month and the time value of money factor, which includes the
inflation rate and treasury bill rate, are more deterministic when forecasting the
following month All-Share Price Index. However, the economic growth factor
showed an insignificant impact on the performance of the Colombo Stock Exchange.
In conclusion, better share market performance of the previous month and time
value of money factor together are significantly impacting to motivate investors in
Sri Lankan stock exchange than other macroeconomic variables (ceteris paribus)
