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: