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The Sri Lankan stock market and the macroeconomy: an empirical investigation

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  • Guneratne Wickremasinghe
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    Abstract

    Purpose – The purpose of this paper is to examine the causal relationships between stock prices and macroeconomic variables in Sri Lanka, in order to examine the validity of the semi-strong form of the efficient market hypothesis. Design/methodology/approach – The paper adopts unit roots and cointegration, error-correction modelling, variance decomposition analysis, and impulse responses analysis to examine the causal relationship between six macroeconomic variables. Findings – The results indicate that there are both short and long-run causal relationships between stock prices and macroeconomic variables. These findings refute the validity of the semi-strong version of the efficient market hypothesis for the Sri Lankan share market and have implications for investors, both domestic and international. Originality/value – The paper addresses several methodological weaknesses in relation to unit root and cointegration tests which previous studies in the area of the paper have overlooked. Further, it uses more variables than those used in a previous study using Sri Lankan data.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 28 (2011)
    Issue (Month): 3 (August)
    Pages: 179-195

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    Handle: RePEc:eme:sefpps:v:28:y:2011:i:3:p:179-195

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    Related research

    Keywords: Cointegration; Colombo Stock Exchange; Efficient market hypothesis; Granger causality; Macroeconomics; Ng-Perron tests; Pantula principle; Sri Lanka;

    References

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    1. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
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    17. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
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    19. Cumhur Erdem & Cem Kaan Arslan & Meziyet Sema Erdem, 2005. "Effects of macroeconomic variables on Istanbul stock exchange indexes," Applied Financial Economics, Taylor & Francis Journals, vol. 15(14), pages 987-994.
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    Cited by:
    1. Khaled, Mohammed & Keef, Stephen, 2011. "On the dynamics of international stock market efficiency," Working Paper Series 1991, Victoria University of Wellington, School of Economics and Finance.

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