Dynamic Relationship between Macroeconomic Variables and Stock Return Volatility in Tehran Stock Exchange: Multivariate MS ARMA GARCH Approach

Investigation of changes in the stock price in Tehran Stock Exchange (TSE) has been always one of the most important challenges in the TSE. The importance of this issue is due to its applications in forecasting the stock price volatility in the stock exchange. Hence, this study investigates the impact of the most important macroeconomic variables which affects the stock return volatility in Tehran Stock Exchange in different regimes during the period 1998:1- 2015:4 by applying non-linear Multivariate MS-ARMA-GARCH approach. The results show that the rate of GDP growth has a significant negative impact on the stock return volatility. The inflation rate, money growth rate and exchange rate volatility have a significant positive impact in different regimes but, oil price volatility has different effects on the stock return volatility. In addition, the results show that the stability in the low return regime (bear regime) is more than the high return regime (bull regime). Therefore, the results recommend that planners and economic authorities through the adopting and implementation of appropriate policies to increase economic growth such as optimal allocation of resources, increased competitiveness, as well as focusing on other economic capacities of the country such as knowledge economy, increasing tourism, transportation sector, information and communication technology, using private sector capacities and increasing investment and also unification of the exchange rate to reduce the exchange rate volatility and reducing the supply of money and inflation rate to reduce volatility in the stock market return.