LONG RUN AND SHORT RUN EFFECTS OF MONETARY AND EXCHANGE VARIABLES ON STOCK PRICES IN IRAN

Year 2012, Volume: 4 Issue: 1, 1 - 10, 01.06.2012

Abbas Alavi Rad Mohammad Reza Eslami

Abstract

The movements in the stock prices are an important indicator of the economy. The
purpose of this paper was to examine the relationship between Tehran Stock
Exchange (TSE) price index and monetary variables in Iran. We have used
Autoregressive Distributed Lag (ARDL) approach and Error Correction Model
(ECM) to determine the effects of monetary and exchange variables on TSE price
index in long run and short run. Quantitative estimates based on the time series
monthly data from 2004 to 2009, indicate that liquidity (M2) has a positive effect
on TSE price index in long run. But, free market exchange rate (FR) and legal
reserves (LR) have a negative effect on TSE price index in long run. On the other
hand, monetary and exchange variables have a significant effect on TSE price
index in short run. However, the coefficient of the Error Correction Term (ECT)
shows that speed of adjustment is slow and the ECM only can explain 69 per cent
of fluctuation of TSE price index.

Keywords

Stock Price Index, Monetary Variables, ARDL Model, ECM

References

• Aggarwal, R., (1981), Exchange Rates and Stock Prices, A Study of the US Capital Markets under Floating Exchange Rates, Akron Business and Economic Review, Vol, 12, No.4, pp.7-12.
• Dickey, D.A., Fuller,W.A ., (1979), Distribution for Autoregressive Time Series with a Unit Root, Journal of the American Statistical Association, Vol, 74, No. 366, pp. 427-431.
• Friedman, M., Schwartz, A.J., (1963), Money and Business Cycles, Review of Economics and Statistics, Vol, 43, No.1, pp. 32-64.
• Johansen, S., Juselius, K., 1990. Maximum Likelihood Estimation and Inference on Cointegration: with Applications to the Demand for Money. Oxford Bulletin of Economics and Statistics 52, 169-210.
• Li, Y., Iscan, T., Xu, K., (2010), The Impact of Monetary Policy Shocks on Stock Prices: Evidence from Canada and the United States. Journal of International Money and Finance, Vol. 29, No.5, pp. 876-896.
• Phillips, P.C.B., Perron, P., (1988), Testing for a Unit Root in Time Series Regression. Biometrika 75, 335-346.
• Perman, R.J., 1991. Cointegration: An Introduction to the Literature. Journal of Economic Studies 18, 3-30.
• Pesaran, M.H., Shin, Y., (1995a), An Autoregressive Distributed Lag Modeling Approach to Cointegration Analysis. DAE Working Papers. No .9514, University of Cambridge.
• Pesaran, M.H., Shin, Y., (1995b), Long run Structural Modeling. DAE Working Paper. No. 9419. University of Cambridge.
• Rahman, M., Mustafa, M., (2008), Influences of Money Supply and Oil Prices on U.S. Stock Market. North American Journal of Finance and Banking Research, Vol. 2, No. 2, pp. 1-12. Ratanapakorn, O., Sharma, S., (2007), Dynamic Analysis between the U.S. Stock Returns and the Macroeconomic Variables. Applied Financial Economics, Vol. 17, No.5, pp. 369-377. Safdari, M., Abouie Mehrizi, M., Elahi, M., (2011), Studying Relationship between Economic Variables on Stock Market Index. International Research Journal of Finance and Economics, Vol, 5, No.76, pp. 121-127.
• Soenen, R., Hennigar, E.S., (1988), An Analysis of Exchange Rates and Stock Prices. The US Experience between 1980 and 1986. Akron Business and Economic Review, Vol. 19, No.4, pp. 71-76.