The Impact of Macroeconomic Variables on the Stock Market: Evidence from Tehran Stock Exchange Market

This paper examines the influence of macroeconomic variables on stock market equity values in Tehran Stock Exchange Market. We use the Tehran Stock Exchange Market all share price index to represent the stock market and (a) money supply, (b) interest rate, (c) consumer price index (as a measure of inflation), (d) exchange rate and (e) trade balance as macroeconomic variables. We use the data quarterly data for the above variables for the 20 quarterly periods from Farvardin 1377 to Esfand 1384 employing a battery of tests, which include unit roots, cointegration, vector error correction models (VECM), impulse response functions (IRFs) and variance decompositions (VDCs). These tests examine both long-run and short-run relationships between the stock market index and the economic variables. The VECM analyses provides some support for the argument that the lagged values of macroeconomic variables have a significant influence on the stock market. Both VDC and IRF analyses reveal that shocks to economic variables explained only a minority of the forecast variance error of the market index and the effects do not persist for very long.