Abstract:
This study examines the long-term interaction between investor behavior and market performance in Sri Lanka, a representative frontier market marked by moderate liquidity and macroeconomic fluctuations. Using monthly data from 1994 to 2024, investor transactions are categorized by type and origin, including purchases and sales by foreign companies, foreign individuals, local companies, and local individuals. Johansen co integration and Vector Error Correction Models (VECM) are applied to assess where these investor groups influence or respond to long-run market dynamics. The results indicate that while overall market movements, peroxide by the all share price index (ASPI), significantly affect all investor categories in the short term, only sales by local individuals play a leading role in long-run equilibrium adjustments. In contrast, foreign investors exhibit reactive behavior, responding to rather than anticipating market shift. These findings question the assumed informational advantage of foreign investors in frontier settings and underscore the critical role of local retail sentiment in price formations. Policy implications include enhancing investor education and managing retail-driven volatility.
