Abstract:
Stock price volatility in emerging markets is strongly shaped by macroeconomic
dynamics, yet Sri Lanka’s specific context remains underexplored. While previous
studies have largely focused on developed and major emerging economies, there is a
clear research gap regarding how Sri Lanka’s economic conditions influence equity
markets. This study bridges that gap by analysing the impact of gross domestic
product (GDP) growth, inflation rate, interest rate, and exchange rate on stock price
performance in the Colombo Stock Exchange (CSE), measured by the All-Share Price
Index. The theoretical foundation is based on the Efficient Market Hypothesis and
Arbitrage Pricing Theory, which explain how macroeconomic variables affect stock
market behaviour. Monthly secondary data from January 2014 to December 2024
were obtained from the Central Bank of Sri Lanka and the CSE. The population
comprises all listed companies on the CSE, represented by the ASPI as the market
index, so separate sampling was not required. Analytical techniques include
descriptive statistics, Pearson correlation analysis, and multiple linear regression,
performed using EViews software to ensure robust statistical testing. The results
reveal that GDP growth positively influences the ASPI, while the interest rate exerts
a significant negative effect. In contrast, inflation and exchange rate fluctuations
show no statistically significant relationship with stock prices. These findings
highlight the critical role of economic growth and monetary policy in shaping Sri
Lanka’s equity market trends. Beyond providing practical insights for investors and
policymakers, this study enriches the limited South Asian literature on emerging
markets by offering country-specific evidence, expanding theoretical understanding
of macroeconomic–stock price linkages in smaller developing economies, and
informing future research on emerging market dynamics in South Asia
