Abstract:
The study investigates the nexus between macroeconomics behaviour and industry indices
performance including all share price index (ASPI) movements in Sri Lanka for the period
1994-2013, using monthly series of the corresponding variables. The objective was
achieved by identifying the influence of macroeconomic variables on major industrial
price index and ASPI. The statistical techniques used include the unit root Augmented
Dickey Fuller test in order to fulfill the objective of stationary for all the time series. The
Johansen co-integration test was used to investigate whether the variables are cointegrated
of the same order taking into account the trace statistics and the maximum
Eigen-value tests. The variables were found to be co-integrated with at least one cointegrating
vector. A Granger causality test was used in order to find the direction of
causality between industry performance and macroeconomic behaviour and finally Vector
Error Correction Model (VECM) was developed to forecast the long term behaviour. The
findings imply that the causality between industry performance and macroeconomic
variables runs unilaterally or entirely in one direction. The results reveal that the average
prime lending rate (AWPR), inflation rate, exchange rate of Britain Pounds (GBP) and
Japanese Yen (JPY) affect all the five major industries while exchange rate of USD does
not influence on telecommunication industry. Moreover, all the macroeconomic variables
have significant influence on diversified holding industry and hotel and travel industry.
Therefore, the best fitted VECM was established in diversified holdings industry and hotel
industry indices. From the results, it was inferred that the movement of industry indices
reflect the macroeconomic condition of the country and can therefore be used to predict
the future path of industry indices behaviour. The results derived in this study can be
effectively used for investment and finance decisions.
