Abstract
Equity Foreign Portfolio Investment (EFPI) is useful in enhancing the efficiency and liquidity of capital markets. This study explores the long-run determinants of EFPI in Sri Lanka using the autoregressive distributed lagged (ARDL) model. The dataset covers monthly time series data from 2004 to 2013. The findings suggest that the London Inter-Bank Offered Rates (LIBOR), foreign reserves presented in months of imports, USD/LKR exchange rate and domestic share market performance measured by the All Share Price Index (ASPI) are statistically significant and have a long-run positive effect on EFPI. The remaining variables, three-month Treasury bill rates, the Colombo Consumer Price Index (CCPI) and the S&P500 index are statistically insignificant. It is further revealed that there is a short-run causality running from months of imports, three month Treasury bill rates, USD/LKR exchange rates and CCPI towards EFPI at the Colombo Stock Exchange (CSE).
Highlights
Background of the StudyThe capital market facilitates long-term fund raising for investment and is a major component of the financial system in an economy
The results of Augmented Dickey Fuller (ADF) unit root test at level show that none of variables other than Equity Foreign Portfolio Investment (EFPI) are stationary at level
The findings confirm a short-run causality running from months of imports towards EFPI in Sri Lanka
Summary
The capital market facilitates long-term fund raising for investment and is a major component of the financial system in an economy. It is an accepted fact that a capital market contributes to an economy in many ways. As noted by Bryan and Debbie (1990), the capital market enables the domestic corporate sector to raise funds in the form of equity, instead of borrowings. Domestic savers are benefited from liquidity and positive returns against inflation, which most other investment instruments fail to offer. A capital market facilitates private enterprises to become public so that they. The capital market is a useful in attracting foreign savings to bridge the savings-investment gap. It paves the way to enter international capital markets
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