Evaluating the Effects of the Monetary Policy on the Total Stock Market Index in the Iranian Economy: Using the TVP-VAR and GARCH Approaches

Document Type : Research Paper

Authors

1 Monetary and Banking Research Institute, Tehran, Iran

2 Strategic Studies Institute, Tehran, Iran

10.22059/ier.2024.348701.1007539

Abstract

This study aims to evaluate the effects of the monetary policy on the total stock market index using Guangton et al. (2021)’s nonlinear approach. Contrary to other research on Iran’s economy that has focused more on long- and short-term relations assuming a fixed parameter approach, this study uses the TVP-VAR (time-varying parameter) and GARCH (generalized autoregressive conditional heteroscedasticity) approaches to examine the effectiveness of monetary policy on the stock market index through the exchange rate, liquidity, and interbank market interest rate channels during 2009:5-2021:10 with a monthly frequency. Results showed that throughout the period under study, changes in monetary policy as expressed in interbank interest and exchange rates did not have the same influence on the total stock market index. While these impacts have been sometimes positive and sometimes negative, those of the liquidity growth rate on the specified index have consistently been positive and significant. The stock market is greatly impacted by changes in interbank interest, exchange, and liquidity rates, therefore monetary policymakers must consider financial stability while regulating these policy variables.

Keywords

Main Subjects

References

Alam, M., & Salah Uddin, G. S. (2009). Relationship between Interest Rate and Stock Price: Empirical Evidence from Developed and Developing Countries. International Journal of Business and Management, 4(3), 43-51.
Bohl, M. T., Siklos, P. L., & Werner, T. (2007). Do Central Banks React to the Stock Market? The Case of the Bundesbank. Journal of Banking & Finance, 31(3), 719-733.
Carpenter, R. E., & Petersen, B. C. (2002). Capital Market Imperfections, High-Tech Investment, and New Equity Financing. The Economic Journal, 112(477), F54-F72.
Chen, N. F., Roll, R., & Ross, S. (1986). Economic Forces and the Stock Market. Journal of Business, 59(3), 83-403
Daei Karimzadeh, S., Sharifi Ranani, H., & Ghasemian Moghadam, L. (2013). Effects of Macroeconomic Variables on the Banks' Stock Price Index. Monthly Economic Journal of Reviewing Economic Issues and Policies, 11&12, 65-90
Dornbusch, R., & Fischer, S. (1980). Exchange Rates and the Current Account. American Economic Review, 70(5), 960-971.
Erdoğan, E., & Özlale, Ü. (2005). Effects of Macroeconomic Dynamics on Stock Returns: Case of Turkish Stock Exchange Market. Journal of Economic Cooperation and Development, 26, 69-90.
Esen, E., & Omit, O. (2005). Effects of Macroeconomic Dynamics on Stock Returns: The Case of the Turkish Stock Exchange. Journal of Economic Cooperation, 26(2), 69-90.
Fada'i Nejad, M. E., & Farahani, R., (2017). Effects of Macroeconomic Variables on the Overall Index of Tehran Stock Exchange. Quarterly Journal of Financial Economics, 11(39), 1-25
Fama, E. F. (1981). Stock Returns, Real Activity, Inflation, and Money. American Economic Review, 71(4), 545–65.
---------- (1965). Random Walks in Stock Market Prices. Financial Analyst Journal, 21(5), 1965- 1974.
Galbraith, J. K. (1955). The Great Crash. London: Penguin Books Paperback Edition.
Gavin, M. (1989). The Stock Market and Exchange Rate Dynamics. Journal of International Money and Finance, 8(2), 181-200
Gay, R. D. (2016). Effect of Macroeconomic Variables on Stock Market Returns for Four Emerging Economies: Brazil, Russia, India, and China. International Business & Economics Research Journal (IBER), 15(3), 119-126.
Gopinathan, R., & Durai, S. R. S. (2019). Stock Market and Macroeconomic Variables: New Evidence from India. Financial Innovation, 5(1), 1-17.
Gu, G., Zhu, W., & Wang, C. (2022). Time-Varying Influence of Interest Rates on Stock Returns: Evidence from China. Economic Research-Ekonomska Istraživanja, 35(1), 2510-2529.
Kim, W. C., & Mauborgne, R. (1999). Creating New Market Space. Harvard Business Review, 77(1), 83-93.
Kontonikas, A., & Kostakis, A. (2013). On Monetary Policy and Stock Market Anomalies. Journal of Business Finance & Accounting, 40(7-8), 1009-1042.
Kyereboah-Coleman, A., & Agyire-Tettey, K. F. (2008). Impact of Macroeconomic Indicators on Stock Market Performance: The Case of the Ghana Stock Exchange. Journal of Risk Finance, 9(4), 365-378.
Lin, F. J., & Ho, C. W. (2019). The Knowledge of Entry Mode Decision for Small and Medium Enterprises. Journal of Innovation & Knowledge, 4(1), 32-37.
Mehrara, M. (2006). The Relationship between Stock Market and Macroeconomic Variables: a Case study for Iran. Iranian Economic Review, 11(17), 138-148.
Mohamadi, Y., Mohamadi, A., & Esmaili Kia, G. (2021). The Effect of Macroeconomic Variables on Stock Portfolio Performance Based on Traditional and Modern Networks. Advances in Mathematical Finance and Applications, 6(3), 1-25.
Musawa, N., & Mwaanga, C. (2017). The Impact of Commodity Prices, Interest Rate and Exchange Rate on Stock Market Performance: Evidence from Zambia. Journal of Financial Risk Management, 06(03), 300-313
Naughton, B. J. (2006). The Chinese Economy: Transitions and Growth. Cambridge, MA: MIT.
Obstfeld, M. (1998). The Global Capital Market: Benefactor or Menace? (NBER Working Papers). Journal of Economic Perspectives, 12(4), 9-30.
Pedram, M., Mousavi, M. H., & Abbasi‌ Aghda, S. (2016). Asymmetric Effects of the Interest Rate on Iran's Stock Price Index. Management and Accounting Studies, Series 2(4), 162-171.
Perera, P. R. M. R. (2016). The Importance of Interest Rate in Determining Stock Returns of Banks Finance and Insurance Companies in Seri Lanka. International Journal of Management and Commerce Innovations, 3(2), 451-454.
Quadir, M. M. (2012). The Effect of Macroeconomic Variables on Stock Returns on Dhaka Stock Exchange. International Journal of Economics and Financial Issues, 2(4), 480-487.
Rashidi, R., & Maddah, M. (2020). The Effect of Interbank Interest Rate on Stock Price (With emphasis on Joint Comprehensive Plan of Action). Quarterly Journal of the Macro and Strategic Policies, 7(5), 50-70.
Richard, A., Adekunle, A., & Hammed, O. (2012). Impact of Interest Rate on Capital Market Growth (A Case of Nigeria). Universal Journal of Management and Social Sciences, 2(11), 1-24.
Ross, S. A. (1976). The Arbitrage Theory of Capital Asset Pricing. The Journal of Economic Theory, 13, 341-360.
Shahabadi, A., Naziri, M. K., & Havvaj, S. (2013). Effects of Macroeconomic Variables on Tehran Stock Exchange Systematic Risk. Quarterly Journal of Economic Researches and Policies, 21(67), 89-104
Shiller, R. J. (2015). Irrational Exuberance: Revised and Expanded (3rd Ed.). Princeton, New Jersey: Princeton University Press.
Thornton, J. (1986). Bank Rediscounting at the Central Bank: A Survey of Alternative Theories and Some Evidence. The South African Journal of Economics, 54(2), 120-128.
Tibebe, A., Omar, A., & Esqueda Andr´e, V. (2016). Stock Returns and Interest Rates around the World: A Panel Data Approach. Journal of Economics and Business, 89, 20-35.
Yi, G. (2019). Money, Banking, and Financial Markets in China. London: Routledge.
Iranian Economic Review
Volume 28, Issue 3
September 2024
Pages 899-920

Files

Share

How to cite

Statistics