Assessing the Exchange Rate Fluctuation on Tehrans Stock Market Price: A GARCH Application
Subject Areas : General Management
Maryam Khalili Araghi
1
(
Department of Business Management, School of Management and Economics, Science and Research Branch, Islamic Azad University (IAU), Tehran, Iran
)
Meisam Mohazzab Pak
2
(
Department of Business Management, School of Management and Economics, Science and Research Branch, Islamic Azad University (IAU), Tehran, Iran
)
Keywords: stock prices, Exchange rates, volatility, Granger Causality, GARCH,
Abstract :
This paper empirically investigates the exchange rate effects of Iranian Rial against Dollar (Rial vs.US) on stock prices in Iran. The sample period for the study has been taken from March 20, 2004 to March 20, 2010 using daily nominal exchange rate of Rial /us and daily closing values of Tehran Stock Exchange. Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model has been used in modeling the relationship between exchange rate volatility and stock market volatility, as it has been proven to give superior results. The paper presents an introduction to the topic, a review of the literature, data used and methodology applied the obtained findings and the corresponding conclusion. For our study, two hypotheses have been formulated and tested with appropriate econometric tests. It was found that both data series were stationary at level form and positive correlation exists between exchange rates and stock market prices and causality exists directionally between the two variables. Positive significant relationship between volatility in stock Prices and in exchange rates has been confirmed by the estimated GARCH model.