Short-term and long-term dynamics between macroeconomic indicators and market fluctuation: a study of Colombo stock exchange

Abstract

As a developing market, the high volatile fluctuations with instability patterns are the common phenomenon in the Colombo Stock Exchange of Sri Lanka. The miscellaneous type of micro and macro-economic conditions directly effect on the market fluctuations. By using Vector Autoregressive Regression and Vector Error Correlation Model to capture the linear inter-dependencies, this study examines the equilibrium relationships between the stock market indices and macro-economic factors in Sri Lankan during the period from January, 2009 to December 2015. The study revealed that macroeconomic variables have direct effect on high volatility in stock market fluctuations in the Colombo Stock Exchange. Furthermore, the results show that Colombo stock exchange is sensitive to the macroeconomic variables such as market capitalization, real gross domestic product and broad money supply.