The Nexus between Stock Price and Exchange Rates: Empirical Evidence from Sri Lanka

Abstract

The purpose of this study is to examine the relationship between stock price and exchange rate in Sri Lanka. Monthly, All Share Price Index (ASPI) and exchange rate of US dollar and Euro from January 2005 to December 2016 were retrieved from Colombo Stock Exchange (CSE) website and Central Bank of Sri Lanka’s monthly publication of Selected Economic Indicators. Unit root test, co-integration test and causality test were applied to test the relationship between stock price and exchange rates. The unit root test proves that in the first differences, there is no unit root. Cointegration test shows that there was no long-run stable equilibrium relationship and causality test revealed. There was no direction of causality stock price to exchange rate and exchange rate to stock price.