Abstract
This study investigates the effects of macroeconomic variables on stock prices in emerging Sri Lankan stock market using monthly data for the period from September 1991 to December 2002. The multivariate regression was run using eight macroeconomic variables for each individual stock. The null hypothesis which states that money supply, exchange rate, inflation rate and interest rate variables collectively do not accord any impact on equity prices is rejected at 0.05 level of significance in all stocks. The results indicate that most of the companies report a higher R2 which justifies higher explanatory power of macroeconomic variables in explaining stock prices. Consistent with similar results of the developed as well as emerging market studies, inflation rate and exchange rate react mainly negatively to stock prices in the Colombo Stock Exchange (CSE). The negative effect of Treasury bill rate implies that whenever the interest rate on Treasury securities rise, investors tend to switch out of stocks causing stock prices to fall. However, lagged money supply variables do not appear to have a strong prediction of movements of stock prices while stocks do not provide effective hedge against inflation specially in Manufacturing, Trading and Diversified sectors in the CSE. These findings hold practical implications for policy makers, stock market regulators, investors and stock market analysts. DOI: 10.4038/suslj.v6i1.1689 Sabaragamuwa University Journal, vol 6, no. 1, pp 50-67
Highlights
The relationship between macroeconomic variables and stock prices has been extensively studied in developed capital markets and literature on the above variables date back to 1970s
Samarakoon, (1996 b, 1998 c, 1998 d); Samarakoon et al (2000); Perera, (1994), Nimal, (1997), Premawardena; (1997)}. This study extends these literatures by considering the relationship between stock prices and macroeconomic variables in the emerging Sri Lankan Stock Market
The results indicate that the exchange rate variable is clearly the most influential macroeconomic variable, and money supply has greater importance
Summary
The relationship between macroeconomic variables and stock prices has been extensively studied in developed capital markets and literature on the above variables date back to 1970s. All the studies cited above suggest that strong relationships exist between macroeconomic variables and stock prices in developed as well as ESMs. most of the studies were carried out in emerging market contexts recently, there is a paucity of such studies in emerging Sri Lankan Stock. Samarakoon, (1996 b, 1998 c, 1998 d); Samarakoon et al (2000); Perera, (1994), Nimal, (1997), Premawardena; (1997)} This study extends these literatures by considering the relationship between stock prices and macroeconomic variables in the emerging Sri Lankan Stock Market. By taking into consideration the above factors, the results of a study of this nature will be of enormous importance for both local and foreign investors, stock market regulators, multinational corporations, stock market analysts and policy makers.
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