Abstract:
Smooth functioning of a stock market is paramount important to a healthy economy.
Investigations of relationship between macro-economic factors and performance of
stock markets at many emerging economies including Sri Lanka are relatively
limited. This study aims to identify the impact of macroeconomic variables on the
stock market performance of Sri Lanka. The dependent variable is the All Share Price
Index of Colombo stock market (ASPI) and the explanatory variables are the Gross
Domestic Product (GDP), Inflation proxy by wholesale price index (WPI), Interest
rate (IR), Balance of payment (BP) and Exchange rate (ER) over the period of 2010
to 2017 in a quarterly basis. All the data were collected from the Central Bank Annual
Reports and from the Colombo Stock Exchange. Data were analyzed using VECM
using E-Views. The results revealed that the macroeconomic variables and the stock
market index (All share price index) in Sri Lanka significantly related. Analysis
further showed that stock market index significantly positively related to GDP, ER
and IR while it is negatively related to the inflation proxies by wholesale price index
of Sri Lanka. The other variable which is the Balance of payment is insignificant in
determining the stock market performance
