Macroeconomic Variables Effect on Financial Sector Performance in Emerging Sri Lankan Stock Market

The objectives of this paper is to examine the degree and pattern of effect of macroeconomic variables on sectoral share price indices in Sri Lanka over the period from January 2008 to December 2012 from employing macroeconomic factor model for monthly data. The findings from multiple regression analysis reveal that exchange rate, treasury bill rate and inflation rate are common variables to explain the variability of all sectoral share prices for the period of 2008 to 2012 except of Telecom sector which has only R2 less than 50 %. The exchange rate and inflation rate have significant effect on all sectoral share prices in line with negative and positive respectively while treasury bill rate has significant negative weak influence on all sectors except of Information Technology and Telecom. Among the selected variables in this study, the exchange rate and inflation have greater importance on most of the sectors further among these two important variables, inflation rate has more powerful variable than exchange rate to explain the variability of share prices of most of the sectors. This pattern of impact is used as a consideration for interested parties in Sri Lankan Stock Market.