The Long-Term Impact of Macroeconomic Stability Variables on Stock Price Volatility

The stock market of a country can be used to explain the behavior of its economy. This study examines the impact of macroeconomic stability variables on stock price volatility in the long term, with reference to the Colombo Stock Exchange (CSE). Previous empirical evidence has shown that the CSE exhibits stock price volatility characteristics similar to those of developed equity markets, even though the CSE has been categorized as a developing equity market. Therefore, it is important to examine the factors influencing this abnormal stock price volatility in the CSE. There is a lack of research examining the long-term impact of macroeconomic stability factors on stock price volatility in the Sri Lankan context. This study employed the Autoregressive Distributed Lag (ARDL) model, as many similar studies have used the ARDL model to identify the impact of macroeconomic stability factors on CSE stock price volatility from a long-term perspective. Five macroeconomic variables-GDP, inflation, money supply, interest rate, and exchange rate were analyzed over a 10-year period from 2010 to 2019. Findings revealed that CSE price volatility does not show a long-term impact from macroeconomic stability variables. However, it shows a considerably less short-term impact on interest rates and exchange rates. Further, these findings suggest that stock price volatility in the CSE may be driven more by market specific factors. Furthermore, due to the absence of strong macroeconomic influence, it can be suggested that there is information asymmetry, investor sentiment, and irrational market behavior in the CSE which affects stock price volatility.