Relationship between inflation and stock market return in Sri Lanka

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 2008 to May 2018. The Colombo Consumer Price Index 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 analysis, it indicates that inflation has a significant positive impact on stock market return at CSE. The study also established that exchange rate has a positive relationship with stock market returns and negative relationship of interest rates on stock market returns. The variables were also found to be significant determinants of stock market returns. This study recommends that attention should be paid by policy makers to the prevailing rates of these selected independent variables as they can highly affect stock market returns recorded at the CSE. The above results have implications for the domestic and international investors as well as the industries, stock market regulators, investors and stock market analyst.