An Investigation into the Relationship between Fluctuations of Monetary Aggregates and Fluctuations of Stock Price Index of Tehran Stock Exchange (Time Period: 2000- 2013)

Abstract

Achievement of long-term and sustainable economic growth requires the optimum mobilization and allocation of financial resources in the national economy which is impossible without the help of financial markets, especially a widespread and efficient capital market. In this regard, the current study aimed to investigate the relationship between the fluctuations of monetary aggregates and the fluctuations of stock price index of Tehran Stock Exchange. Data used in the present study are entire stock price index of Tehran Stock Exchange and monetary aggregates quarterly including money supply, volume of liquidity and monetary base over the time period of 2000-2013. To describe the relationships among the studied variables, the effect of macroeconomic variables including interest rate, gold price, consumer price index and housing price on the index of Stock Exchange were also addressed. The model applied in this study is Vector Auto Regressions (VAR) and using correlogram Test and unit root test including Augmented Dicky Fuller (ADF), the stationary of variables used in the model was evaluated. Using Johansen method, co-integration vectors were achieved in the estimated model, also long-term relationships among the model variables were expressed via these vectors. Also, using an impulse response, the response of an endogenous variable was examined to the change of one of the disturbance or stimulation terms over time. Also, the analysis of forecast error variance was used to investigate the percentage of changes in the target variable by its shocks and those by other variables. The results showed that the changes in stock price index have a positive correlation with volume of money but a negative correlation with money supply and monetary base.