The Effect of Financial Liberalization on the Stock Market in Iran

The purpose of financial markets liberalization followed by most developing countries in recent decades is to improve the efficiency of financial markets and financial resources. This paper examines the relationship between share prices index and financial liberalization index in Iran during 1373-1387 using quarterly time series data. It uses more comprehensive and recent technique, Vector Autoregressive and Co-integration approach to determine the short run and long run linkages between share prices Index and financial liberalization. The findings indicate that financial liberalization index has a positive impact on share prices Index in long run, but no impact in short run. Financial liberalization and reforms started in early 1990s, as part of economic reforms, has a very strong direct effect on the stock market. It means that stock market is too much sensitive and volatile to financial liberalization in emerging economies.