Abstract:
The issue on the relationship between stock market performance and the
interest rate has been discussed by economist and researchers since both play
important roles in influencing one nation’s economic development. The aim
of this paper is to examine the relationship between short-term interest rate
and stock market performance for Sri Lankan stock market using the data from
July 2005 to June 2015. We used three-month Treasury bill rate as the proxy
for the short-term interest rate and All Share Price Index (ASPI) as the proxy
for the stock market performance. In addition to the short-term interest rate,
the regression model consists of other three important macroeconomic
variables such as money supply, consumer price index and exchange rate in
order to extract the effect of monetary policy, country’s price level and foreign
exchange rate on the stock market performance. The Multiple regression
results in displays that the relationship between short-term interest rate and
stock market performance exist as significantly negative. Further, the study
found that the exchange rate and inflation rate have negative and money
supply has a positive relationship with ASPI. The findings of the study hold
practical implications for policy makers, stock market regulators, investors,
and stock market analysts.
