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, three
month Treasury bill rates, USD/LKR exchange rates and CCPI towards EFPI at the Colombo Stock Exchange
(CSE).
