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Mohamed Haniffa

Mohamed Haniffa Macquarie Research Student
  • Title: Mr
  • Position: PhD Student - Department of Economics

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Student information

  • Load: PhD Student Full Time
  • Associate supervisor: Professor Lance Fisher
  • Date of submission: 21/02/2011
  • Abstract:

    The Colombo Stock Exchange (CSE), which has seen many ups and downs since its inception in 1896, has emerged as a well-organized stock market in the region. According to published research reports, scanning the Asia Pacific region, Colombo was one of the best performing stock markets in Asia in early 1990s. The liberalization of the economy embarked in 1977 attracted foreign portfolio investors to Sri Lanka. Records show that the foreign portfolio investment has been a major contributor to the growth of the CSE. During the great bull run (1993/94), massive foreign inflows drove the market to record heights. But this spectacular performance could not be maintained as expected. Since then the market plunged downward causing severe losses to the CSE and investors. A major reason for this collapse was the withdrawal of funds by the foreign investors, due to global and especially domestic factors.

    It is also argued that Sri Lanka is rapidly losing its economic relevance within the subcontinent. Other markets such as India, Pakistan and Bangladesh have also initiated economic liberalization programs since 1990s. Given free access, fund managers will be at liberty to choose the most attractive market to invest in. It is in such an environment the CSE will have to compete for global capital. It will be critical for the domestic exchange to compare favourably with other emerging markets. It will not only have to provide an innovative, competitive environment to attract foreign investors but also stay ahead. This, no doubt will be a hard task. But there appears to be no other alternative.

    Very high volatility in stock indices is one of the major characteristics in CSE during last decade. This condition has lead to withdrawal of much needed foreign funds from Sri Lanka. Amid the remarkable efforts to improve the activities of the CSE the level of the performance could not be improved to the level of 1993-94. Rapid change of governments during the last decade and the contradictory policies of these governments were the major contributing factors to the gloomy state of affaires. Due to above said reasons the market is experiencing very high volatile price conditions which lead to the withdrawal of major foreign investors.

    Therefore, it is in this context a deep study to look into matters pertaining to the volatility and stock return become vital. In order to attract foreign investors and staying ahead; a study of this nature is much needed.  This study will help the CSE to take precautionary measures and or prepare ahead to avoid failure to a great extent. Otherwise the CSE would fail to attract the international investors and thereby lose foreign funds greatly desired. Importantly Sri Lanka mainly relies on foreign funds to sustain the domestic stock market. Therefore identifying the effect of foreign inflows of funds on the market will also be useful.

    The analysis of the time varying stocks returns and investigation of return volatility are crucially important for many issues in macroeconomics and finance.

    This study examines stock return volatility of the All Share Price Index (ASPI) using Auto Regressive Conditional Heteroskedastic (ARCH) and Generalised ARCH models that capture most common stylised facts on asset returns. Additionally, we examine the effect of exchange rate fluctuations have any impact on the volatility of index return. The degree of integration between the Sri Lankan and the major East Asian capital markets over the last ten years will also be analysed.