Macroeconomic indices and capital market: evidence from Tehran Stock Market

Abstract

The increasing trend of financial market makes it necessary to study about these markets. Stock market is one of the basic components of the financial markets. Besides equipping local savings and leading them to production, stock market as an important part of the capital market is able to support growth and expansion of the economy. Stock market not only impacts the national economy, but also it influences on the international economy as well. Therefore, there is a significant relation between the evolution of stock market and economic boom and depression, and also macroeconomic variables in each country. In view of the fact that stock market index is affected by different factors, especially macroeconomic variables, this research aims to investigate the effect of such variables (inflation, liquidity, real exchange rate) on the stock price index of the Tehran Stock Exchange using monthly data and considering Auto-Regressive Distribution Lag Method (ARDL) during the period of 2005-2014. The results of the research show that there is a long run relation between stock price index and the investigated variables (inflation, liquidity and real exchange rate). According to the findings, inflation due to current public spending and revising portfolio has a negative effect on the Tehran Stock Price index. In addition, real exchange rate and inflation has a negative effect on such an index.