Abstract:
A vibrant stock market is of critical importance if a developing economy is to attain a
high growth trajectory. In Sri Lanka stock market performance has been considered a
key indicator of its economic as well as business health. This paper intends to examine
the causal relationship between stock prices and macroeconomic variables and investigate the effects of macroeconomic variables on the dynamics of stock price
movements in the Sri Lankan stock market. To empirically examine the long-run
relationships and short-run dynamic interactions among the variables of interest, this
study employs the autoregressive distributed lag bound test approach. The study uses
monthly statistical data of macroeconomic and political stability variables such as
industrial production, inflation rate, money supply, real exchange rate, trade openness,
the average weighted prime lending rate, all share price index and war data from
January 2007 to December 2019. The results reveal a significant relationship between
stock market returns and macroeconomic and political stability variables except all
share price index.
