The Sources of Stock Market Volatility: A Study on the Colombo Stock Exchange

Stock Market Volatility

Key finding of the study

The findings revealed that internal/own and external shocks substantially impact the stock price volatility in CSE. Significant volatility clusters and persistence with extended memory in ASPI confirm internal/own shock in the market.

Authors

M.I.M. Riyath, Department of Accountancy and Finance, Faculty of Management and Commerce, South Eastern University of Sri Lanka, Oluvil, Sri Lanka

N.J. Dewasiri, Department of Accountancy and Finance, Sabaragamuwa University of Sri Lanka, Belihuloya, Sri Lanka

M.A.M.M. Siraju, Capital Works and Planning Division, Eastern University, Sri Lanka, Vantharumoolai, Chenkaladi, Sri Lanka

A. Jahfer, Department of Accountancy and Finance, South Eastern University of Sri Lanka, Oluvil, Sri Lanka

K. Sood, Chitkara Business School, Chitkara University, Punjab, India

Summary

This study investigates internal/own shock in the domestic market and three external volatility spillovers from India, the UK, and the USA to the Sri Lanka stock market. This study employs a quantitative method using ARMA (1,1)-GARCH(1,1) model. All Share Price Index (ASPI) is the proxy for the Colombo Stock Exchange (CSE) stock return. It uses daily time-series data from 1st April 2010 to 21st June 2023. The findings revealed that internal/own and external shocks substantially impact the stock price volatility in CSE. Significant volatility clusters and persistence with extended memory in ASPI confirm internal/own shock in the market. Furthermore, CSE receives significant volatility shock from the USA, confirming external shock. This study’s findings highlight the importance of considering internal and external shocks in portfolio decision-making.

Understanding the influence of internal shocks helps investors manage their portfolios and adapt to market volatility. Recognising significant volatility spillovers from external markets, especially the USA, informs diversification strategies. From a policy standpoint, the study emphasises the need for robust regulations and risk management measures to address shocks in domestic and global markets. This study adds value to the literature by assessing the sources of volatility shocks in the CSE, employing the ARMA-GARCH, a sophisticated econometrics model, to capture stock returns volatility, enhancing understanding of the CSE’s volatility dynamics.

Published in

Emerald Studies in Finance, Insurance, and Risk Management

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