The Relationship between the Macroeconomic Variables and the Tehran Stock Exchange Market Index 1999 -2009

ABSTRACT: This thesis empirically investigates the relationship between the macroeconomic variables that affect the stock returns during the years between 1999M1- 2009M6 for the Tehran Stock Exchange (TSE). The Arbitrage Pricing (APT) modelling framework is conducted by assuming the risk factors in the model as observable macroeconomic variables to explain the stock return variations. A multifactor regression model in this framework is employed to show the relevant macroeconomic variables namely: industrial production, interest rate, inflation, exchange rate and money supply. The Ordinary Least Square (OLS) technique is applied to test the validity of the model and the relative importance of different variables which may have an impact on the Tehran Stock returns within the Iranian economy. Based on the empirical results estimated, explanatory power supports the view that macroeconomic variables explain a significant part of the observed variations in Tehran Stock Market returns for the sample period. Since the main macroeconomic variables have been taken into account within the model, the estimation results imply that some macroeconomic variables, namely short-term interest rate, money supply, exchange rate and oil production have an influence on Tehran Stock Market returns. Keywords: APT, CAPM, OLS Analysis, Tehran Stock Exchange, Iranian Economy. ……………………………………………………………………………………………………………………………………………………………………………………………………………………