THE EFFECT OF THE FOREIGN EXCHANGE RATES ON THE STOCK MARKET PERFORMANCE IN SRI LANKA

Abstract

The study aims to analyze the nature of the relationship between foreign exchange rates and the stock market performance in the Sri Lankan context. The study adopted a quantitative research approach where publicly available secondary was used for the study. The study gathered data for 19 years from Jan’2000 – Jan’2019, where the data set was tested for unit root and given the non-stationary nature of data; the cointegration model test was applied. The study findings depict the absence of a significant co-integration between the exchange rates and the stock market performance in the Sri Lankan context. The relationship among the foreign exchange rates and the stock prices is of paramount importance for both local and foreign investors implying the decisions regarding the foreign exchange risk hedging and the portfolio performance will depend on this relationship. To the best of our knowledge, this is one of the early studies in Sri Lanka to identify the association between exchange rates and stock returns by covering a period of 19-years.