Impact of the macroeconomic variables on all share price index : garch-X approach

Abstract

This study examines the dynamic impact of macroeconomic variables on all share price index (ASPI) volatility. Data were collected for the period commence from January 2006 to December 2015 using Central Bank annual reports and publications of Colombo stock exchange. Money supply, interest rates, consumer price index, exchange rate, and industrial production index were used as macroeconomic variables of the study. The AR(1)-GARCH (1, 1)-X model was identified as the significant model to model volatility of all share price index series. It was found that the previous all share price index (lag 1) positively and significantly affects the current all share price index implying that the volatility of stock market prices is affected by related news from the previous period (lag 1) more than by past volatility. Negative values of two parameters of the GARCH indicates that shocks to the conditional variance take a short time to die out, so volatility is not persistent. The result further implies that the volatility in interest rate and industrial production index are highly impact for the volatility of all share price index. The Johansen-Juselius cointegration test suggested that macroeconomic variables in the system share a long run relationship. Results imply that, all share price index has significant positive long run relationships with money supply, interest rate & exchange rate while significant negative long run relationships with industrial production index & consumer price index. The results of this study can be utilized for better decision making in share market.