Analysis of the relationship of stock market with exchange rate and spot gold price in Sri Lanka

Abstract

Intention of this thesis is to analyze the interrelationship of stock market volatility with LKR/USD exchange rate and spot gold prices in Sri Lankan stock market. There are several statistical techniques used in this study, such as Unit Root Augmented Dickey Fuller test, Box-Pierce test, Ljung–Box test, ARCH LM test in order to identify the relationship between stock returns and macroeconomic variables. Daily data for All Share Price Index, Exchange rate and Spot gold prices were collected over six-year period from 4th Jan 2010 to 4th Mar 2016. EGARCH specification, which was proposed by Nelson was used to model the variables in order to derive an equation to forecast the future behavior of stock returns. Evidently, statistical model depicted a strong evidence on non-existence of relationship between stock returns and exchange rate but it was proven the strong negative relationship between stock returns and spot gold price returns.