Comparing the Influential of Stock Return of Selected Exporter and Importer Industries from the Exchange Rate Fluctuations

اقتصاد پولی مالی

Article 5, Volume 25, Issue 16, October 2018, Pages 93-132   

Document Type: پژوهشی

DOI: 10.22067/pm.v25i15.56874

Authors

mahdieh rezagholizadeh^* ; Majid Aghaei

Mazandaran

Abstract

Introduction
Iran has faced with high fluctuations in exchange rates in recent years and this volatility plays an important role in determining the return of exporter and importer industries in Iran. Thus, this study will estimate the relationship between exchange rate and return of exporter and importer industries in Tehran stock exchange. In addition, world oil price, excess market return, inflation rate and interest rate, which are the most important variables affecting the stock return, will be introduced as explanatory variables.
Theoretical framework
Exchange rate is a very important factor in a country’s economy and in the Stock market. An increase in the exchange rate leads to more expensive imports for domestic industries and increases their production costs. This has a negative effect on industries’ profit and their dividends and thus decreases their stock return. On the other hand, an increase in the exchange rate leads to more export and also improves the competition position of domestic producers and thus has a positive effect on the stock returns. The relationship between foreign currency and stock can also be investigated from another point of view; foreign currencies (especially the U.S. dollar) are an alternative asset for stock in countries. Hence, an increase in the exchange rate may increase the demand for foreign currency and shift some part of investor’s money from the stock market to the exchange market, leading to a decrease in the stock return.
We estimate the relationship between exchange rate, world oil price, excessive market return, inflation rate and interest rate, and return of exporter and importer industries in Tehran stock exchange for two groups of industries. We consider four major export industries (ie.e, metal ores mining; cement, lime and plaster; basic metal; and chemicals and by-products) and the four major import industries (i.e., motor vehicles and auto parts; pharmaceuticals; machinery and equipment; and non-metallic mineral products) in Iran, respectively. These industries are closely related to international markets and all of their transactions are conducted by international currency and thus any fluctuations in exchange rate will affect their stock return. Considering the importance of these two groups in Iran’s economy, we estimate the relationship between their stock returns and mentioned variables to analyze how these variables, particularly exchange rate, affect export and import industries in Iran.
Methodology
The long run and short run relationship between exchange rate and return of exporter and importer industries in Tehran stock exchange will be estimated using economic theory, and Panel Error Correction Model (PECM), panel cointegration and causality tests during 2005-2016. Long run and short run coefficients estimations have been done using Dynamic Ordinary Least Square (DOLS) and Pooled Mean Group (PMG) respectively.
Conclusion
The results indicate that there is a long-run equilibrium relationship between exchange rate, excessive market return (premium), real crude oil price, inflation rate and interest rate with stock return. The relationship between exchange rate and stock return of exporter industries is positive and there is a bidirectional relationship between these variables. This relationship in importer group is negative.

Keywords

panel Error Correction Model; Panel Co integration; Exchange Rate; Stock return; Exporter Industries; Importer Industries

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