Trade Openness and the Behaviour of Stock Prices in Iran

Abstract

This paper investigates the relationship between trade openness, banking sector developments, real GDP and Tehran Stock Exchange (TSE) price index covering the period of 1993Q1–2011Q4. Previous studies have investigated the direct effects of macroeconomic variables on the stock prices in Iran. This study for the first time in previous literature in Iran examines the direct effects of trade openness on stock prices in Iran. We have tested an econometric model of stock prices in compliance with Basu and Morey (2005). The ARDL bounds testing approach is applied to examine the cointegration. The error correction model (ECM) is also applied to estimate the model in short run. Our empirical findings confirm the existence of cointegration between the series. We find that trade openness has a negative effect on TSE price index in long-run and short-run. Moreover, banking sector developments and real GDP have a positive impact on TSE price index in long-run and short-run.

Australian Academy of Accounting and Finance Review, vol 1, issue 1, July 2015, page 29-43