An Analysis of the Conditional Relationship between Risk and Return in the Tehran Stock Exchange

Authors

1 Faculty of Economics, University of Mazandaran, Babolsar, Iran

2 Charles H. Dyson School of Applied Economics and Management, Cornell University, New York, United States

3 Department of Economics, Management & Accounting, Yazd University, Yazd, Iran

Abstract

This paper examines the factors that affect stock returns in the Tehran Stock Exchange, the largest stock exchange in Iran.  In particular, we analyze the conditional relationship between risk and return in Iran by estimating the relationship between various sources of risk - market risk, oil price risk, exchange rate risk, gold price risk, inflation risk, skewness, and kurtosis - and the stock return in the Tehran Stock Exchange over the period March 2005 to March 2019. The methodology used in this paper is a multi-factor model that allows the impact of the risk factors to have asymmetric effects depending on whether returns for the respective risk factor are increasing or decreasing. We analyze the risk-return relationship for four groups of industries: the top ten industries by market cap, the five largest energy-consuming industries, the four major export industries, and the four major import industries. We find significant conditional relationships between risk and return for all the risk factors considered.
 

Keywords

References

Abbasi, E., Kaviani, M., & Farbod, E. (2017). Testing the Traditional CAPM and MCAPM on Tehran Stock Exchange. Journal of Applied Research on Industrial Engineering, 4(2), 148-157.
Aghaei, M., & Lin Lawell, C. -Y. C. (2021). Energy, Economic Growth, Inequality, and Poverty in Iran. Singapore Economic Review, Retrieved from https://clinlawell.dyson.cornell.edu/Iran_energy_growth_poverty_inequality_paper.pdf
Alqisie, A., & Alqurran, T. (2016). Validity of Capital Assets Pricing Model (CAPM): Empirical Evidences from Amman Stock Exchange. Journal of Management Research, 8(1), 207-223.
Alshomaly, I., & Masa'deh, R. (2018). The Capital Assets Pricing Model & Arbitrage Pricing Theory: Properties and Applications in Jordan. Modern Applied Science, 12(11), 330-337.
Basher, S. A., Haug, A. A., & Sadorsky, P. (2012). Oil Prices, Exchange Rates and Emerging Stock Markets. Energy Economics, 34(1), 227-240.
Basher, S. A., & Sadorsky, P. (2006). Oil Price Risk and Emerging Stock Markets. Global Finance Journal, 17, 224-251.
Bazoobandi, S. (2020). Iran’s Stock Market: Growth in the Midst of a Recession? Retrieved from https://www.atlanticcouncil.org/blogs/new-atlanticist/irans-stock-market-growth-in-the-midst-of-a-recession/
Black, F. (1972). Capital Market Equilibrium with Restricted Borrowing. Journal of Business, 45, 445-450.
Black, F., Jensen, M. C., & Scholes, M. (1972). The Capital Asset Pricing Model: Some Empirical Tests. In M. C. Jensen (Ed.), Studies in the Theory of Capital Markets. New York: Praeger.
Boyer, M. M., & Filion, D. (2007). Common and Fundamental Factors in Stock Returns of Canadian Oil and Gas Companies. Energy Economics, 29, 428-453.
Campbell, J. Y., Lo,, & MacKinlay, A. C. (1997). The Econometrics of Financial Markets. Princeton, NJ: Princeton University Press.
Carp, L. (2012). Can Stock Market Development Boost Economic Growth?: Empirical Evidence from Emerging Markets in Central and Eastern Europe. Procedia Economics and Finance, 3, 438-444.
Chan, K. C., Chen, N., & Hsieh, D. A. (1983). An Explanatory Investigation of the Firm Size Effect. Journal of Financial Econometrics, 14, 451-471.
Chen, N. -F., Roll, R., & Ross, S. A. (1986). Economic Forces and the Stock Market. Journal of Business, 59(3), 383-403.
Chiang, T. C., & Zhang, Y. (2018). An Empirical Investigation of Risk-return Relations in Chinese Equity Markets: Evidence from Aggregate and Sectoral Data. International Journal of Financial Studies, 6(35), 1-22.
Corderi, D., & Lin, C. -Y. C. (2011). Measuring the Social Rate of Return to R & D in Coal, Petroleum and Nuclear Manufacturing: A Study of the OECD Countries. Energy Policy, 39(5), 2780-2785.
Davis, L. W., & Hausman, C. (2020). Are Energy Executives Rewarded for Luck? Energy Journal, Retrieved from https://www.iaee.org/en/publications/download-instant.aspx?id=3582
Demirgüç-Kunt, A., & Levine, R. (1996). Stock Markets, Corporate Finance, and Economic Growth: An Overview. World Bank Economic Review, 10(2), 223-239.
El-Sharif, I., Brown, D., Burton, B., Nixon, B., & Russell, A. (2005). Evidence on the Nature and Extent of the Relationship between Oil Prices and Equity Values in the UK. Energy Economics, 27, 819-830.
Elshqirat, M. (2019). An Empirical Examination of the Arbitrage Pricing Theory: Evidence from Jordan. Journal of Studies in Social Sciences, 18(2), 46-67.
Fama, E., & French, K. (1992). The Cross-section of Expected Stock Returns. Journal of Finance, 47, 427-465.
Fama, E., & MacBeth, J. D. (1973). Risk, Return and Equilibrium: Empirical Tests. Journal of Political Economy, 71, 607-636.
Fletcher, J. (2000). On the Conditional Relationship between Beta and Return in International Stock Returns. International Review of Financial Analysis, 9, 235-245.
Goriaev, A. (2004). Risk Factors in the Russian Stock Market. Retrieved from https://pages.nes.ru/agoriaev/Goriaev%20risk%20factors.pdf
Hammoudeh, S., & Aleisa, E. (2004). Dynamic Relationships among GCC Stock Markets and NYMEX Oil Futures. Contemporary Economic Policy, 22, 250-269.
Hammoudeh, S., Dibooglu, S., & Aleisa, E. (2004). Relationships among US Oil Prices and Oil Industry Equity Indices. International Review of Economics and Finance, 13, 427-453.
Hammoudeh, S., & Huimin, L. (2005). Oil Sensitivity and Systematic Risk in Oil-sensitive Stock Indices. Journal of Economics and Business, 57, 1-21.
Hausman, J. A. (1978). Specification Tests in Econometrics. Econometrica, 46, 1251-1271.
Henriques, I., & Sadorsky, P. (2008). Oil Prices and the Stock Prices of Alternative Energy Companies. Energy Economics, 30, 998-1010.
Hodoshima, J., Garza-Gómez, X., & Kunimura, M. (2000). Cross-sectional Regression Analysis of Return and Beta in Japan. Journal of Economics and Business, 52(6), 515-533.
Huang, B. N., Hwang, M. J., & Peng, H. P. (2005). The Asymmetry of the Impact of Oil Price Shocks on Economic Activities: An Application of the Multivariate Threshold Model. Energy Economics, 27, 455-476.
Hussain, N., & Khan, A. Q. (2014). An Analysis of the Stock Return and Exchange Rate Variation on Market Return of Pharmaceutical Industry in Pakistan. World Applied Sciences Journal, 31(6), 1180-1187.
Iran Offers Incentives to Draw Investors. (2010). Press TV, Retrieved from https://www.memrieconomicblog.org/bin/content.cgi?news=3465
Iranian stock market in fast recovery. (2010). The National, Retrieved from https://www.thenational.ae/business/markets/iranian-stock-market-in-fast-recovery-1.500536
Isakov, D. (1999). Is Beta Still Alive?: Conclusive Evidence from the Swiss Stock Market. European Journal of Finance, 5, 202-212.
Izedonmi, P. F., & Abdullahi, I. B. (2011). The Effects of Macroeconomic Factors on the Nigerian Stock Returns: A Sectoral Approach. Global Journal of Management and Business Research, 11(7), 1-20.
Jahan-Parvar, M., & Mohammadi, H. (2013). Risk and Return in the Tehran Stock Exchange. Quarterly Review of Economics and Finance, 53(3), 238-256.
Jorgenson, D. W. (1998). Growth, 2: Energy, the Environment, and Economic Growth. Cambridge, MA: MIT Press.
Jorgenson, D. W. (2018). The World KLEMS Initiative: Measuring Productivity at the Industry Level (663-698). In E. Grifell-Tatje, C. A. Knox Lovell, and R. C. Sickles (Eds.), The Oxford Handbook of Productivity Analysis. Oxford: Oxford University Press.
Kerestes, V. H., Corderi Novoa, D., & Lin Lawell, C. -Y. C. (2021). The Rate of Return to Research and Development in Energy. Retrieved from https://clinlawell.dyson.cornell.edu/KLEMS_paper.pdf
Kheiravar, K. H., & Lin Lawell, C. -Y. C. (2021). The Effects of Fuel Subsidies on Air Quality: Evidence from the Iranian Subsidy Reform. Retrieved from http://clinlawell.dyson.cornell.edu/energy_subsidies_air_quality_paper.pdf
Kheiravar, K. H., Lin Lawell, C. -Y. C., & Jaffe, A. M. (2021). The World Oil Market and OPEC: A Structural Econometric Model. Retrieved from http://clinlawell.dyson.cornell.edu/world_petroleum_mkt_dynamic_game_paper.pdf
Kim, H. -B., & Sohel Azad, A. S. M. (2020).  Low-frequency Volatility and Macroeconomic Dynamics: Conventional versus Islamic Stock Markets. Singapore Economic Review, Retrieved from https://www.worldscientific.com/doi/abs/10.1142/S0217590819420049
Kraus, A., & Litzenberger, R. H. (1976). Skewness Preference and the Valuation of Risk Assets. Journal of Finance, 31(4), 1085-1100.
Lintner, J. (1965). The Valuation of Risky Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budget. Review of Economics and Statistics, 47, 13-37.
Lynn, M. (2014). Are you Brave Enough to Invest in Iran? MarketWatch, Retrieved from https://www.marketwatch.com/story/are-you-brave-enough-to-invest-in-iran-2014-03-26
Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77-91.
Mehrara, M., Falahati, Z., & Zahiri, N. H. (2014). The Relationship between Systematic Risk and Stock Returns in Tehran Stock Exchange using the Capital Asset Pricing Model (CAPM). International Letters of Social and Humanistic Sciences, 21, 26-35.
Mili, M. (2019). The Impact of Tradeoff between Risk and Return on Mean Reversion in Sovereign CDS Markets. Research in International Business and Finance, 48, 187-200.
Mossin, J. (1966). Equilibrium in a Capital Asset Market. Econometrica, 34(4), 768-783.
Ng, D. T. (2004). The International CAPM when Expected Returns are Time-varying. Journal of International Money and Finance, 23, 189-230.
Pamane, K., & Vikpossi, A. E. (2014). An Analysis of the Relationship between Risk and Expected Return in the BRVM Stock Exchange: Test of the CAPM. Research in World Economy, 5(1), Retrieved from https://ideas.repec.org/a/jfr/rwe111/v5y2014i1p13-28.html
Papapetrou, E. (2001). Oil Price Shocks, Stock Market, Economic Activity and Employment in Greece. Energy Economics, 23, 511-532.
Park, J., & Ratti, R. A. (2008). Oil Price Shocks and Stock Markets in the US and 13 European Countries. Energy Economics, 30, 2587-2608.
Pettengill,, Sundaram, S., & Mathur, I. (1995). The Conditional Relation between Beta and Return. Journal of Financial and Quantitative Analysis, 30, 101-116.
Pravin, C., & Dhananjay, P. (2019). An Empirical Test of CAPM with Referance to S & P BSE Sensex Index. Research Review International Journal of Multidisciplinary, 4(2), 52-58.
Refai, H. A. (2009). Empirical Test of the Relationship between Risk and Returns in Jordan Capital Market. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1491406_code381278.pdf?abstractid=1443367&mirid=1
Ross, S. (1976). The Arbitrage Theory of Capital Asset Pricing. Journal of Economic Theory, 13, 341-360.
Sabetfar, P., Cheng, F. F., Mohamad, S., & Amin Noordin, B. A. (2011). Test of Arbitrage Pricing Theory on the Tehran Stock Exchange: The Case of a Shariah-compliant Close Economy. International Journal of Economics and Finance, 3(3), 109-118.
Sadorsky, P. (2001). Risk Factors in Stock Returns of Canadian Oil and Gas Companies. Energy Economics, 23(1), 17-28.
Salehi, M., Karimzadeh, M., & Paydarmanesh, N. (2017). The Impact of Iran Central Bank’s Sanction on Tehran Stock Exchange. International Journal of Law and Management, 59(3), 365-375.
Sharpe, W. F. (1964). Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk. Journal of Finance, 19, 425-442.
Sharpe, W. F. (1970). Portfolio Theory and Capital Markets. New York: McGraw-Hill.
Shinde, Y., & Mane, T. (2019). An Empirical Assessment of Capital Asset Pricing Model with Reference to National Stock Exchange. International Journal of Trend in Scientific Research and Development, Retrieved from https://www.academia.edu/
Sinaee, H., & Moradi, H. (2010). Risk-return Relationship in Iran Stock Market. International Research Journal of Finance and Economics, Retrieved from http://rms.scu.ac.ir/Files/Articles/Journals/Abstract/IRJFE_41_12.pdf2011531112724156.pdf
Tang, Y. N., & Shum, W. C. (2003a). The Conditional Relationship between Beta and Returns: Recent Evidence from International Stock Markets. International Business Review, 12, 109-126.
---------- (2003b). The Relationships between Unsystematic Risk, Skewness and Stock Returns During Up and Down Markets. International Business Review, 12, 523-541.
Tehran Stock Exchange. (2012). Retrieved from https://search.tse.ir/search/en/index.html?gId=42
Theriou, N. G., Aggelidis, V. P., Maditinos, D. I., & Šević, Ž. (2010). Testing the Relation between Beta and Returns in the Athens Stock Exchange. Managerial Finance, 36(12), 1043-1056.
Tiwari, A. K., Jena, S. K., Mitra, A., & Yoon, S. -M. (2018). Impact of Oil Price Risk on Sectoral Equity Markets: Implications on Portfolio Management. Energy Economics, 72, 120-134.
Treynor, J. L. (1962). Toward a Theory of Market Value of Risky Assets (15–22). In R. A. Korajczyk (Ed.), Asset Pricing and Portfolio Performance. London: RiskBooks.
---------- (1961). Market Value, Time, and Risk. Retrieved from https://www.academia.edu/download/38740211/French2015Treynor1961MarketValueTimeAndRisk.pdf
Tunali, H. (2010). The Analysis of Relationships between Macroeconomic Factors and Stock Returns: Evidence from Turkey Using VAR Model. International Research Journal of Finance and Economics, 57, 169-182.
Turvey, C. G., Driver, H. C., & Baker, T. G. (1988). Systematic and Nonsystematic Risk in Farm Portfolio Selection. American Journal of Agricultural Economics, 70(4), 831-836.
Uwubanmwen, A., & Eghosa, I. L. (2015). Inflation Rate and Stock Returns: Evidence from the Nigerian Stock Market. International Journal of Business and Social Science, 6(11), 155-167.
Zhang, J., & Lin Lawell, C. -Y. C. (2017). The Macroeconomic Rebound Effect in China. Energy Economics, 67, 202-212.
Iranian Economic Review
Volume 26, Issue 1
March 2022
Pages 79-107

Files

Share

How to cite

Statistics