The Reaction of Stock Returns of Iranian Different Industries to Inflation and Interest Rates with the Panel-ARDL Approach

Considering the upward trend of the inflation rate and the relative stabilization of the nominal interest rate in Iran, this question becomes important: how have the stock returns of different industries reacted to these two macroeconomic variables? In this article, the effect of inflation and interest rate on stock returns of different industries in Iran is investigated empirically according to monthly data of the period April 2010- March 2022 using Panel-ARDL model. First, to make the comparison between stock indices of different industries possible, these indices were homogenized based on a base month and then the model was estimated. Empirical results show that inflation in the short and long term has a positive and significant effect on the nominal returns of stocks of various industries for the period, but inflation has a negative and significant effect on the real returns in the long term. The nominal interest rate in the short and long term causes a decrease in the nominal and real returns of stocks of various industries. In addition, the variables of exchange rate, global oil price, and liquidity were also considered as control variables. These results show that stocks have not been able to protect against inflation in the long term, and monetary authorities should pay attention to its effects on the stock market when managing interest rates.