Analyzing the causal relationship between stock prices and selected macroeconomic variables: evidence from Sri Lanka

Causal relationship between Stock prices and macroeconomic variables is significant for people those investing or trading in the Stock market. Therefore current study mainly focused to find the causal relationship between All Share Price Index (ASPI) in Colombo Stock Exchange and Selected macroeconomic variables namely Inflation (INF), Exchange Rates (EXR) and twelve month Treasury Bill Rates (TBR) during the 6 year period from January 2004 to June 2010. Different types of statistical techniques such as Unit Root Tests, Co-integration Test, and Granger Causality Test were applied. Results show that there are co-integration between ASPI and Inflation as well as ASPI and Twelve month Treasury Bill Rates. Further results indicate that Inflation Granger causes ASPI and Twelve month Treasury Bill Rates Granger causes ASPI.