The Impact of Exchange Rate Volatility and Uncertainty on Stock Returns in Tehran Stock Exchange (Case Study: Agriculture and Food Industry)
Subject Areas : Computational economics
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Abstract :
Extended Abstract Based on macroeconomics and development economics theories, developing countries, like Iran, are facing a high degree of instability of macroeconomic variables. Fluctuations and exchange rate shocks, create an uncertain environment for investors and make decisions unconfident situation for future investments. The empirical study of the relationship between fluctuation and instability exchange rate and share returns in the Tehran Stock Exchange market is discussed. The empirical results make it possible for the decision-making managers of the agriculture and food industries to analyze the interaction and behavior of stock returns and exchange rates simultaneously. Second, a better understanding of the short-term movements of these two markets allows financial managers to make informed financial decisions and investments. In such a situation, the policy maker should be aware of applying policies that cause more volatility in the currency market and create uncertainty in it, in order to provide the basis for the sustainable growth of the capital market. Purpose The fluctuations of the exchange rate as an effective contribution to the proper direction, and a more favorable opportunity to be made for trade, and your investment; for the exchange rate from canal of export and import affect the cost of export, stock prices, and returns. This research investigates the effects of volatility and uncertainty of exchange rates on the stocks return of share in cluster of export-oriented, and the import-oriented and agri-food industries. As a result, the research question is: the share returns of companies listed on the Tehran Stock Exchange (separated to export-oriented, import-oriented, and agricultural and food industries), in case of exchange rate instability and uncertainty (currency fluctuations), in the period of 2010 to 2019 how will it be affected by it? Methodology This investigation led to a series of 165 holding companies for period of 2010-2019. The volatility measure by Generalized autoregressive conditional heteroscedasticity (GARCH) method and based model estimate by Structural vector autoregressive model (SVAR). In the first stage, the conditional and generalized heterogeneity variance model is used to extract exchange rate fluctuations. In the next step, the structural vector explanatory model (SVAR) has been used to investigate the effect of currency instability and uncertainty (currency fluctuations) on the returns and stock prices of companies. To estimate the SVAR model, the self-explanatory vector model or the normal VAR model must be estimated first. After determining the optimal interval and performing model validation tests, by applying structural constraints, reaction functions based on structural constraints are specified. Finally, by using shock reaction functions, the effects of currency instability and uncertainty (currency fluctuations) on the stock returns of companies are evaluated. Finding The result shows that there is significant relationship between the exchange rate fluctuations stock return of import - oriented company but in other cases, the export- oriented and Agri-food companies there is no relationship between shares return, and fluctuations of exchange rate even by year lag. Conclusion The impact on the exchange rate and its fluctuations on import-oriented industries is due to the dependence of the industries on imported raw materials (including inputs and machinery and equipment), which imposes costs on producers at rates higher than the supporting exchange rates, and against the stability policy of central bank of Iran leads to the impossibility of foreign exchange rates with the market exchange rates and their foreign exchange income acquisition. This policy constitutes a disconnection of the effect of the exchange rate and its fluctuations on stock returns. The change in the exchange rate from the import channel will affect the cost of intermediate goods, as a result, the prices of the companies' shares will change. For example, with the decrease in the value of the domestic currency, the import price of intermediate and capital goods increases and their import decreases. As a result, stock returns decrease due to the decrease in investment. According to the results of the research, it is suggested to shareholders and lenders to pay attention to exchange rate fluctuations as a factor affecting stock prices in order to make correct and principled decisions of investing in companies' shares and granting credit. If the exchange rate fluctuations are directed in the right direction as a factor affecting stock prices, a more favorable environment for trade and investment will be provided; Because the exchange rate change from the import channel will affect the cost of intermediate goods, as a result, the stock price of the companies will change. For example, with the decrease in the value of the domestic currency, the import price of intermediate and capital goods increases and their import decreases. As a result, stock returns decrease due to the decrease in investment.