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

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  • Khezrzadegan, Hamed

    (Auditor, Supreme Audit Court)

Abstract

This paper focused on analyzing the dynamic response of stock prices to exchange rate changes in Iran from 1385M1 to 1402M4 through the 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 of predicting one market from another, which contradicts the efficient market hypothesis. This finding implies that stock and foreign exchange markets are asymmetrically interdependent, making it quite impossible for investors to effectively diversify their portfolios. Moreover, the stock prices respond to short-run changes in the exchange rate and asymmetrically to financial disequilibrium. Concerning the asymmetric adjustment, the response of stock prices to the negative phase of disequilibrium is faster (in absolute terms) than to the 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 the stock market

Suggested Citation

  • Khezrzadegan, Hamed, 2024. "Asymmetries in the Iran Stock Price – Exchange Rate Nexus: A Momentum Threshold Autoregressive (MTAR) Approach," Quarterly Journal of Applied Theories of Economics, Faculty of Economics, Management and Business, University of Tabriz, vol. 11(3), pages 227-252, June.
    • Handle: RePEc:ris:qjatoe:0352
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    More about this item

    Keywords

    Threshold cointegration; Asymmetric adjustment; Exchange rate; Stock prices;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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