Nexus between asymmetric information and stock market volatility: evidence from Sri Lanka

This study examines the impact of asymmetric information behaviour and macroeconomic variability in modelling the stock market volatility. CSE market does not show the characteristics which may potentially lead to larger volatility shocks. The idiosyncratic volatility is more subjected to the irrational investment decisions with the absence of relevant market information. Therefore, the information asymmetries motivate investors to highly depend on irrational reasons which lead to irrational volatility shocks. The variance equation of the EGARCH model was applied for identifying the impact of the asymmetric information behaviour. The mean-variance equation of EGARCH has been modelled with GDP, inflation, interest rate, and money supply for recognizing macroeconomic impacts. The study finds that the CSE market was significantly experiencing asymmetric information problem. As a result, uninformed investors make their decision based on the market sentiment creating irrational price volatilities. The mean-variance equation shows that macroeconomic variability has a significant impact on explaining the future asymmetric conditional volatility. However, CSE volatility spends a few weeks to adjust the relevant macroeconomic shocks.