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

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  • Guneratne Wickremasinghe

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.

Suggested Citation

  • Guneratne Wickremasinghe, 2011. "The Sri Lankan stock market and the macroeconomy: an empirical investigation," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 28(3), pages 179-195, August.
    • Handle: RePEc:eme:sefpps:v:28:y:2011:i:3:p:179-195
    DOI: 10.1108/10867371111141954
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    Cited by:

    1. Pallegedara, Asankha, 2012. "Dynamic relationships between stock market performance and short term interest rate Empirical evidence from Sri Lanka," MPRA Paper 40773, University Library of Munich, Germany.
    2. Mitra Lal Devkota, 2018. "The Dynamic Causality Between Stock Prices And Macroeconomic Variables: Evidence From Nepal," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 6, pages 5-14, December.
    3. Mohammed S. Khaled & Stephen P. Keef, 2014. "On the dynamics of international stock market efficiency," Cogent Economics & Finance, Taylor & Francis Journals, vol. 2(1), pages 1-11, December.
    4. Javed Pervaiz & Junaid Masih & Teng Jian-Zhou, 2018. "Impact of Macroeconomic Variables on Karachi Stock Market Returns," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 28-34, February.
    5. Mitra Lal Devkota, 2019. "Testing The Causality And Cointegration Between Exports, Imports, And Exchange Rates: Evidence From India," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 5-13, February.

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