Long-run relationship between macro economic factors and stock market performance in Sri Lanka

Abstract

This paper investigates the long-term relationship between macro economic factors namely; gross domestic product, money supply, treasury bill rate, exchange rate, inflation rate and stock market performance such as All share price index and market capitalization in the Sri Lankan market using quarterly data of economic variables for the period 1996 to 2014. The stationary of the data is tested using Augmented Dickey Fuller (ADF) test. It was found that all variables are stationary on first differencing. The relationships between macro economic factors and indicators of stock market performance are investigated using Johansen co-integration tests, and OLS. Co-integration results indicate the existence of long-run relationship between macro economic factors and stock market performance indicators. Further analyses show that money supply and inflation are positively related with stock market performances but exchange rate, GDP and treasury bill rate are negatively related to the stock market performances.