MACROECONOMIC FACTORS’ INFLUENCE ON THE STOCK MARKET PERFORMANCE: A STUDY ON THE COLOMBO STOCK EXCHANGE

Abstract

Sri Lanka, a developing country relies on the Colombo Stock Exchange (CSE) for capital generation and relies on the economic growth of the country to be competitive. Similarly, the economy bank on the CSE for its economic growth. The stagnant economic growth and gradual stock market growth have stranded the CSE in global financial integration. It is of utmost importance in identifying the method of revitalizing CSE. Thus, the objective of the study is to identify the influence of key macroeconomic indicators on CSE. The study used the All-Share Price Index (ASPI), interest rate, inflation rate, exchange rate, real GDP, and narrow and broad money supply through the period 2010 to 2020 in identifying macroeconomic causality on the stock performance. The time series nature and the presence of unit roots in variables except interest rate led to the VECM estimations. The study identified the hedging effect of stock prices against inflation and the negative impact of real GDP and interest rates suggested the flight-to-quality behaviour of investors in switching from the stock of CSE to other investments or other stock markets than CSE. The influence of the exchange rate was positive and could be owing to the pegged exchange. However, the money supply did not have a significant impact on the stock prices in the long run. The study implicates the findings of prior studies. Therein, it is vital in reviving the stock market and in attracting foreign investment through stability within the CSE and the economy. Incorporation of the study findings in policy development could replenish the stagnant capital market by implementing investor-friendly macroeconomic policies and regulations.