The Relationship between Stock Return and Monetary Variables: A Case Study for Iran

The purpose of this study is to investigate the effects of interest rate, inflation, money supply and exchange rate on the stock market index in Iran over the period 2001–2013. A vector error correction model (VECM) approach to cointegration analysis is used to study both the short-run and long-run movements of Tehran stock market. The results show that the value of interest rate, inflation and exchange rate have significant negative effects on the stock index in Iran. The results also indicate that the money supply has a significant positive effect. The result of error correction model indicates that 0.28 percent of the deviation of the stock index from its equilibrium path is corrected in each period.