Relationship between inflation and stock market return: special reference to the Colombo stock exchange (CSE).

Abstract

This study investigates the relationship between inflation and Stock market return in Sri Lankan stock market using monthly data including 120 monthly observations for the period of ten years starting from June 2005 to July 2015.The Colombo Consumer price was used as the proxy for the Inflation and All share price Index was used as the proxy for the Stock market return. Descriptive analysis, and regression analysis was employed to identify the relationship between the variables under bivariate and multivariate models. According to the bivariate regression analysis, it indicates that Inflation has a significant positive impact on stock market return in Sri Lanka while; Inflation has negative and significant impact on stock market return with the impact of control variables interest rate, exchange rate and money supply under multivariate regression analysis. Finally it concludes that inflation has a significant positive relationship with the Stock market return under bivariate analysis and when they corporates with control variables it has a negative relationship with stock market return under multivariate analysis. The above results have implications for the domestic and international investors as well as the industries, policy makers, stock market regulators, investors and stock market analyst