Long-Run Determinants of Equity Foreign Portfolio Investment (EFPI) in Sri Lanka: A Time Series Analysis with Autoregressive Distributive Lag (ARDL) Approach

Abstract

Equity Foreign Portfolio Investment (EFPI) is useful in enhancing the efficiency and liquidity of capital markets. This study explores the long-run determinants of EFPI in Sri Lanka using the autoregressive distributed lagged (ARDL) model. The dataset covers monthly time series data from 2004 to 2013. The findings suggest that the London Inter-Bank Offered Rates (LIBOR), foreign reserves presented in months of imports, USD/LKR exchange rate and domestic share market performance measured by the All Share Price Index (ASPI) are statistically significant and have a long-run positive effect on EFPI. The remaining variables, three-month Treasury bill rates, the Colombo Consumer Price Index (CCPI) and the S&P500 index are statistically insignificant. It is further revealed that there is a short-run causality running from months of imports, threemonth Treasury bill rates, USD/LKR exchange rates and CCPI towards EFPI at the Colombo Stock Exchange (CSE).

Foreign Portfolio Investment and Earnings Quality: Evidence from Sri Lanka

“…When considering the studies on FPI in Sri Lanka, Kumara and Dayaratne (2015) examined the determinants of FPI in Sri Lanka. They employed London Inter-Bank Offered Rates (LIBOR), foreign reserves presented in months of imports, USD/LKR exchange rate, and All Share Price Index (ASPI) as independent variables and concluded that ASPI has a statistically significant and long-run positive effect on foreign purchases.…”

“…When considering the Sri Lankan context, there is a number of studies available to investigate foreign direct investments (Thilakaweera, 2012;Mustafa and Santhirasegaram, 2014;Balamurali & Bogahawatte, 2004) whereas limited studies examined the on FPI. For example, Ariyarathna and Wijesinghe (2014) and Kumara and Dayaratne (2015) examined FPI.…”