Satyendra Kushwaha 1*, Sarad Chandra Kafle 2 1BBA Student, Valley State College, Pokhara University, Nepal 2Department of Research, Oxford College of Engineering and Management, Pokhara University, Nepal *Correspondence email: satyendrakushwaha141@gmail.com

Abstract

The stock market is a complex entity that can be influenced by a myriad of factors. However, gross domestic product (GDP) and Inflation rate are considered two most critical variables affecting the stock market’s performance. This research aims to investigate the impact of GDP and inflation on the volatility of stock exchange performance of Nepal and Sri Lanka by employing the Least Square Regression Approach. Both countries are situated in South Asia and boast agrarian-based economies. Additionally, they are renowned for their rich cultural heritage, ancient civilizations, and historical sites. As a result, this research is centered on investigating the unique aspects of these two nations. Time series data of closing stock of every fiscal year from 1997 to 2021 were collected from websites and analyzed with the help SPSS Version 20.

The findings of this study indicate a significant influence of GDP and inflation on stock index of both countries (p-value < 0.05). The analysis further indicates that the microeconomic variables accounted for 78.7% and 91.9% of the stock index variation for Nepal and Sri Lanka, respectively. Furthermore, the study finds a strong positive correlation betwee n GDP and stock index of both countries, while inflation exhibits a weak negative correlation with the NEPSE index and a moderate negative correlation with the CSE index. Despite the focus on only two independent macroeconomic variables, this research highlights their significant impact on stock market performance. Policymakers and investors can leverage these findings to make informed decisions while navigating the complexities of the stock market.

Keywords:Colombo Stock Exchange; Correlation Analysis; Inflation, Nepal Stock Exchange, Real Gross Domestics Product, Regression Analysis