Macroeconomic Variables and Stock Prices : A Study of Colombo Stock Exchange (CSE) in Sri Lanka

One of the most enduring debates in economics is whether financial development causes economic growth or whether it is a consequence of increased economic activity. Financial markets play an important role in the process of economic growth and development by facilitating savings and channelizing funds from surplus unit to deficit unit. Stock market plays a significant role in the economic development of a country. A number of studies have been investigated on the causal relationship between economic indicators and stock exchange prices. Many studies have been made from time to time; however, after post war to find out the causal relationship between the economic variables and stock prices is vital to the policy makers. There are many factors which influence the stock market and ASPI. This study is focused on that how macro-economic variables influence the stock prices of CSE in Sri Lanka. For the reason four macro independent variables i,e Interest Rate (IR), Exchange Rate (ER), Balance of Payment(BOP) and Gross Domestic Product (GDP) were taken under consideration to measure influences of these factor on dependent variable of All Share Price index(ASPI). For analysis, secondary data was taken for 20 years from 1993 up to 2012.Yearly data was used considering all of the variables. Excel sheet was used to arrange the Data and SPSS was used to analyze the data. The findings revealed that GDP is significantly strong positive correlation with ASPI. Further there is a significant positive correlation between ER and ASPI whenever negatively correlated with IR. Finally, multi regression analysis indicates that macroeconomic variables significantly impact on stock prices