Factors Influencing Capital Market in Iran

This paper analyzes the factors influencing capital market for the period 1991-2013 based on quarterly data. The research variables consist of Price index of stock exchange, liquidity, inflation rate, GDP, exchange rate, tax revenues and government expenditure. We employed Johansen-Juselius co-integration test, Vector Autoregressive (VAR) method and Error correction model (ECM) in order to investigate the relationship between variables. Results of impulse response functions show that stock returns response positively to one-unit innovation in liquidity. The random shock of government expenditure has a slight impact on stock returns in the short-term. However, after the second period, positive effect of these shocks appears, so that government expenditure shows a positive effect on stock index in the long-term. The taxes random shock indicate a negative effect on the stock price index. The effect of positive random shock on GDP is positive. Overall, the results show that the macroeconomic variables such as inflation rate, exchange rate and GDP have significant effects on stock returns in Tehran Stock Exchange. Thus, improving economic factors plays a significant role in booming of capital market. In addition, the fiscal policy factors such as tax revenues and government expenditure have greater effects than monetary policy factors on stock returns. Finally, the results of ECM implies that in each period, 31 percent of the errors disappears and the model is approaching toward long run equilibrium