Abstract:
The main objective of this paper is to investigate the Impact of Foreign Investor
Trading Activity on the Colombo Stock Market by utilizing the monthly time
series data for the share price index (ASPI) and data for the foreign trading
activity of the Colombo Stock Exchange (CSE) over thirty years from January 01
1993 to September 31, 2023. In Sri Lanka, after experiencing three decades of
war, the Sri Lankan stock market showed significant growth in 2011, achieving a
7.2 percent growth rate attributed to a stable business environment, increased
investor confidence, and favorable macroeconomic conditions. However, this
growth was disrupted by a series of unexpected shocks, including the Easter
Attack, the COVID-19 Pandemic, subsequent lockdowns, and political and
economic crises. Given this context, it is crucial to investigate the impact of
foreign trading activity on the overall performance of the Sri Lankan stock
market. Understanding the role of foreign investors in this volatile environment
can provide insights into the mechanisms that drive market stability and growth
and inform strategies to mitigate the adverse effects of future shocks. The ARCH
model was used to run the regression. The descriptive statistics reveal that the
Sri Lankan stock market is not interested in foreign investors diversifying their
portfolio choices. Market volatility induces foreign investors to sell more than
purchase the shares in the share market, suggesting positive trading feedback
from foreign investors. Secondly, the ARCH model Results show that All share
price indices (ASPI) and foreign net purchases are influenced by the magnitude
of past errors in predicting returns of foreign trading activity. The findings of this
study provide relevant insight into the market participants and government
regulators.
