Sensitivity of stock prices to economic events: econometric evidence from Sri Lankan stock market and US stock market

D.A.I Dayarathne,Rajith Lakshman

doi:10.4038/suslj.v11i1.5886

D.A.I Dayarathne, Rajith Lakshman

Open Access

https://doi.org/10.4038/suslj.v11i1.5886

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Abstract

This paper attempts to examine the sensitivity of stock prices to economic events in an emerging market and in a developed market. Historically several studies have been undertaken on the stock market sensitivity on important economic events in several markets. The sensitivity of stock prices to major economic events is measured by using the volatility test of Inclan and Tiao which objectively differentiates the volatile period from the weekly data series of both markets. The All Share Price Index (ASPI) and New York Stock Exchange (NYSE) Composite Index are used for the volatility test of Inclan and Tiao (1994). Then, the major economic events are matched with the volatility periods of the prices. It is found that the stock prices in both markets are highly sensitive to the major economic events. The findings of this study consistent with Bailey and Chung (1995) who find that important political events tend to be associated with sudden change in volatility. Thus this suggests that portfolio managers should be cautious in advising their clients in dynamic situations in the markets in this nature. DOI: http://dx.doi.org/10.4038/suslj.v11i1.5886Sabaragamuwa University Journal 2012; V. 11 No. 1 pp 21-32

Highlights

Statistical literature on changes of variance started with Hsu et al, (1974) who unearth this formulation as an alternative to the Pareto distribution model stock returns
The market portfolios of the two markets are highly sensitive to the major economic events historically occurred in the country
It is found that the stock markets are highly volatile when the markets are exposed to major economic events such as stock market crises

Summary

Introduction

Statistical literature on changes of variance started with Hsu et al, (1974) who unearth this formulation as an alternative to the Pareto distribution model stock returns. The current study attempts to link the relationship between the stock market volatility and major economic events and stock market crisis periods both in CSE and NYSE. Stock markets as an element which operate in the whole financial system are highly sensitive to the macro economic and political environment in the country This causes the volatility in the stock prices which results for the huge losses for the investors. Main Causes of Volatility of Stock Returns It is generally believed that various economic and firm specific factors are driving forces of stock market crisis. There is a close relationship between stock market volatility and economic crisis

Sri Lankan Stock Market and US Stock Market

Ck CT

Global Crises

Conclusion