Determining the nonlinear effect of the money market interest rate on the Tehran stock exchange by the means of generalized autoregressive conditional heteroskedasticity (GARCH) model and smooth transition regression (STR) model

Subject Areas : Financial engineering

Mohammad Mehdiabadi ¹ , Rahmatollah Mohammadipour ²

1 - Department of Accounting and Financial Management, Science and Research Branch, Islamic Azad University, Tehran, Iran
2 - Department of Accounting and Financial Management, Science and Research Branch, Islamic Azad University, Tehran, Iran

Received: 2019-02-17 Accepted : 2019-04-28 Published : 2019-09-23

Keywords: interbank interest rate, smooth transition regression (STR) model, nonlinear methods, Brock- Dechert - Scheinkman (BDS) test, Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model,

Abstract :

Among macroeconomic variables, interest rates are the most important ones; however, the impact of interest rates on prices and returns on the stock exchange is not so clear. In the other words, the relationship between interest rates and stock prices over time is not constant. The purpose of this study is to investigate the relationship between the money market (interbank loan market) interest rates and stock market performance, as well as to investigate the predictability of price behaviour in the Tehran Stock Exchange. To determine effects as well as prediction, GARCH model is applied, also the Brock- Dechert - Scheinkman test (BDS) was used to determine the nonlinear behavior of the series for the stock market risk premium. The research findings confirmed the predictability and nonlinearity relationship between examined variables. Also, the research findings indicated that there is a meaningful relationship between the interbank loan rate with the price to income ratio of the Tehran Stock Exchange