Asymmetries in the Iran Stock Price – Exchange Rate Nexus: A Momentum Threshold Autoregressive (MTAR) Approache

Document Type : Research Paper

Author

Supreme Audit Court, Tehran, Iran

Abstract

This paper focused on analyzing the dynamic response of stock prices to exchange rate changes in Iran from 1385M1 to 1402M4 through Momentum threshold autoregressive framework. The results of the threshold model show an asymmetric threshold long-run (cointegration) relationship between stock and foreign exchange markets in Iran, indicating the possibility to predict one market from another, and this is in contradiction with the efficient market hypothesis. This finding implies that stock and foreign exchange markets are asymmetrically interdependent, making it quite impossible for investors to achieve an effective diversification of their portfolios. Moreover, the stock prices respond to short-run changes in exchange rate as well as asymmetrically to financial disequilibrium. With respect to the asymmetric adjustment, the response of stock prices to negative phase of disequilibrium is faster (in absolute terms) than to positive phase of disequilibrium. Going by the role of asymmetry, the Central Bank should follow an asymmetric intervention pattern (with respect to exchange rate depreciation and appreciation) to strengthen the domestic currency and reduce pressure on stock market.

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References

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Quarterly Journal of Applied Theories of Economics
Volume 11, Issue 3 - Serial Number 42
December 2024
Pages 227-252

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