THE IMPACT OF FOREIGN INVESTOR TRADING ACTIVITY ON THE COLOMBO STOCK MARKET

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.