Investigating the Relationship Between the Real Exchange Rate and Price Index of Tehran Stock Exchange: An ARDL Approach

The Stock Exchange Market is prima facie considered to be one of the main pillars of the capital market in the country and hence it has tremendous capacity to mobilize and allocate the unutilized aggregate savings for accelerating the process of economic growth and subsequently achieving the economic development. However, in this paper an attempt is made ipsofacto, to assess the long-run relationship between the price index of Tehran Stock Exchange and real exchange rate. We conducted the study based on monthly data for the period of 2002-2008, by utilizing the Auto Regressive Distributed Lag (ARDL) Model. The results perse, indicate that the stock market price index is positively correlated with the real exchange rate. Also the estimation results for Error correction Model (ECM) show that for each year, about 36% of imbalances will be adjusted towards the long-run equilibrium.