The relationship between exchange rates, short and long- term interest rates and stock returns of banks accepted in Tehran Stock Exchange

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1 International Research Journal of Applied and Basic Sciences 2013 Available online at ISSN X / Vol, 5 (8): Science Explorer Publications The relationship between exchange rates, short and long- term interest rates and stock returns of banks accepted in Tehran Stock Exchange zohre lalooee nasirabadi 1, Maryam Khalili Araghi 2 1. M.Sc of Accounting of Department of Accounting, Faculty of Accounting, Scienceand Research Branch, Islamic Azad University, Zahedan, Iran Department of Business Management, Science and Research Branch, Islamic Azad University, Tehran, Iran *Corresponding Author ABSTRACT: Banks play a key role in the implementation of monetary policy and exchange rate. Since the macroeconomic variables affect stock returns, in this study investigates the significant relationship and accumulation relationship between Index s of bank Stock returns with macroeconomic variables such as exchange rates, short and long term interest rates for adopted bank in Tehran stock Exchange has been paid. Therefore, using time series data during 2003 to 2011 as a seasonal, suggested model is estimated. In this study, the multiple regression model, and Autoregressive Distributed Lag (ARDL) and error correction model (ECM) was used to test the model. The findings suggest that between the exchange rates and short-term interest rates with bank stock returns index is positive and significant relationship ( long- term variable interest rates was not significant and therefore has no effect on the model). According to the results obtained from a cointegration test is a long term relationship between the exchange rates, short and long term interest rates with the banks stock returns index, in that the relationship between the exchange rate and long term interest rate, there is positive relationship and between short-term interest rates has a negative relationship with stock returns banks index. Keywords: stock returns, exchange rates, interest rates, co-integration INTRODUCTION financial markets are one of the most important markets in each country. The actual condition of the market economy strongly has an impact on real sectors of economy and strongly affected from other sectors (not necessarily in the short term). One important component of the financial markets is the Stock Exchange. Investments in stock market make up a significant part in economy of country, and without doubt the greatest amount of capital through stock markets exchange around the world. Stock markets are affected by macroeconomic and non-economic parameters and many other variables. Several factors affect capital markets and being unknown cause uncertainty in investment. One of the basic criteria for deciding on stock returns are returns, Stock returns alone has information content and more potential investors use it in financial analysis and forecasts. Stock returns of the banking industry are widely reflecting the performance of the banking sector. Theoretical back ground and review of literature Index variable generally reflects the overall condition of the stock market, that in the advanced economies, increasing of this index means prosperity and decline means the recession. To calculate the stock price index should have last information of changes in stock prices and trading volumes. Tehran Stock Exchange Index of prices for the three groups is calculated as follows: General Market Price Index: in its calculation, stock price of all the companies traded is affected. Main Site Price Index: in its calculation stock prices of companies traded on the main board is affected. Sub Site price Index: in its calculation stock prices of companies traded on the main board is affected. Factors affecting stock price changes: factors affecting stock prices can be divided into two categories: internal and external. Internal factors can be cited as follows: Interest and dividend policy, capital structure, financial data quality of company management, industry, dependence on foreign exchanges, commodity status, major changes in the price of final products, the General Assembly of shareholders, such as stock splits, bonus shares and more. External factors that affect stock prices also include economic factors (inflation, monetary and fiscal policy, foreign debt,

2 exchange rate changes, changes in oil prices, interest rates, etc.), social and cultural factors, and political factors and so on. Identify factors affecting stock returns are always the subject of researches in the literature of accounting and financial management and economics. Motamedi (2010), in the study discussed the effect of exchange rates, inflation rates, bank interest rates and oil prices on the Tehran Stock Exchange stock price index. Also has examined, Long-term relationship among the variables for the period using monthly test bank boys, Shin and Smith (2001) and Autoregressive Distributed Lag (ARDL). Causality between variables, using the causality test Toda - Yamamoto (1995) and vector error correction model (1987) is investigated. The research results show that between the exchange rate, interest rates and oil prices with stock market indices, there is a long-term relationship and based on causality Toda - Yamamoto (1995) of the bank interest rates and the exchange rate to the total price index there is a unidirectional causality. Also based on the error correction method of Granger (1987), there is a short-term causality from exchange rates and interest rates to the total stock price index and in the long term there is a causal relationship from the exchange rate and Oil shocks and interest rate to the total Index of stock market prices. Musai et al. (2010), in their investigation studied accumulation and causality between variables of money supply, Gross Domestic Product and exchange rate with total stock price index. The results show that between the exchange rate and total stock price index, there is a long-term relationship. Also the Granger causality test results indicate that exchange rates affect on a boom or bust of the stock market. Sajjadi et al (2010), the relationship between inflation, money growth, exchange rates, bank real interest rates and oil earnings with a growth rate of total stock price index in the seasonal period , using Regressive Distributed Lag vector, were analyzed. The results of co-integration test, a significant correlation between oil earning, exchange rates and bank real interest rates with stock price index growth rate in the ninety percent confidence level, was rejected. Maysami and Koh (2000) when investigating the long-term equilibrium relationships between the Singapore stock index and selected macroeconomic variables and Singaporean stock returns found with the assistance of a VECM that the Singapore stock market is interest and exchange rate sensitive. They also found that the Singapore stock market was significantly and positively co integrated with the stock markets of Japan and the USA. Hondroyiannis and Papapetrou (2001) examined macroeconomic influences on the stock market for Greece. Among the macroeconomic variables investigated were interest rates and exchange rates. They too found that stock prices do not lead changes in real economic activity but that the macroeconomic activity and foreign stock market changes only partially explained Greek stock price movements. They found that oil price changes did explain Greek stock price movements and had a negative impact on economic activity. James (1987) found empirical evidence in the USA market that there is a positive and statistically significant stock price response for a company, which acquires a bank loan, compared to a negative stock price response for debt placed privately with insurance companies. According to Greenbaum and Thakor (1995) it is quite clear that given problems of private information and moral hazard, credit markets cannot be any more than semi-strong form efficient. Banks therefore have an important role to play in resolving problems of information asymmetry. Banks enhance the informational efficiency of credit markets, as they possess privileged financial information that is then passed on to others. METHODS The study in terms of purpose is functional and in terms of the nature is the cross - sectional survey. And the nature of the research methodology is considered the correlation and regression analysis as in this research; influence of independent variables for the dependent variable is criteria. The research population is all banks accepted in Tehran Stock Exchange. In this study, all series data time in seasonal way from May 2003 to April 2011 as a statistical population is considered. To do this study, part of the data base consists of the design method are collected in the library method, also part of information related to test hypotheses has been extracted from the central bank website and the website of the Tehran Stock Exchange. Hypotheses There is a significant relationship between the index of bank stock returns and exchange rate. There is a significant relationship between the index of bank stock returns and short- and long- term interest rates. There is a significant relationship between the index of bank stock returns and exchange rates and interest rates of short and long- term accumulation. Definition of variables 1003

3 Currency: Currency between two countries is the price in which based on that, trade takes place between them. Exchange rate in economic systems, especially in developing countries has importance because of the need to import foreign products. Most firms need to exchange to provide raw materials, technology and machines. If based on the effect of changes in economic and other influential factors, the exchange rate rises, firms are forced to pay more money to import. Pay more for imports causes firms to reduce liquidity. Lack of liquidity of the firms has a negative effect on the distribution of profits and the stock returns. So, it is expected that unexpected changes in exchange rates may have an effect on the expected return of share. Interest rates: in financial markets, interest rate is borrowing costs and the return of the amount that is loaned and its variants include: Real interest rate, the nominal interest rate. In financial markets, the interest rate that the bank pays is a nominal interest rate and increase in purchasing power is known the real interest rate. Stock return: the benefits awarded to the stock will be entitled stock returns. Usually the most important criterion for evaluating business performance now is stock return rate. This criterion alone has the information to investors and will be used for performance evaluation. When this criterion is reduced this is an alarm for the company and show the company performance doesn t display properly. Returns for investors are the driving force that motivates and is considered as rewards for investors. DATA ANALYSIS METHODS in this research, firstly, the software Eviews 4 to determine Stationary and non stationary models is used, and then regression models of multivariate time series used, and bank stock returns is estimated through Autoregressive Distributed Lag (ARDL), using software Microfit 4. RESULTS Before model estimation, reliability and non reliability of variables are examined. To evaluate the reliability and non reliability of variables Dickey Fuller test generalized (ADF 1 ) is used. Uses of Dickey Fuller test disturb autocorrelation terms. So, generalized Dickey Fuller test is used. To perform this test, the software Eviews 6 is used. The results of unit root test surface and subtracting the first-order of variables in the following table is presented: Table 1. Unit root tests on the variables Fuller Intercept without trend variables Number of Interrupts Significance level Statistics Test Critical value stock Returns 0 99% exchange rates 1 99% short-term interest rate 0 99% long-term interest rates 0 99% The results of unit root test shows that some of the variables in level I (0) andsome of the variables on the difference of the first order I (1) are the plateau. Therefore, we use the ARDL approach to test the model. To test the model, we use software of Microfit4. The first hypothesis test: Table 2. shows the results of the first hypothesis variables Normality Heteroscedasticity Independent dependent Coefficient Prob(t) Significance level Statistics Significance level Statistics Stock Returns exchange rates D.W: 2.75 Prob(F):0.000 R-Squared : 0.67 according to the table above, first hypothesis for at least a significant level for the exchange rate variable is equal to that because this number is smaller than 5% error level, null hypotheses is not a significant based on this variable and being a significant variable instead will be accepted. With observe of a diagnostic statistic in the table above, the following results are obtained: LM statistic test for the detection of residual words normal distribution is equal to and at the significance level of the statistic is obtained. Considering error level of 5 % and comparison with the minimum level of significance, the null hypothesis is accepted based on the normal distribution of residual words. 1 Augmented Dickey-Fuller 1004

4 LM statistic to identify similarities or difference variance equal to and minimum significance level of the test is obtained. Considering the 5% error and compare with the minimum significance level, the null hypothesis was rejected based on similarity variance and other hypothesis (difference variance) is accepted. One of the most important factors in the estimation of the coefficient is determination or diagnosis. The determination coefficient (R2) is equal to 0.67, which represents the average of the dependent variable explained by the independent variables. Correlation coefficient is 0.81, which represents the full and direct relationship between exchange rates and stock returns. Fisher probability also is a that the null hypothesis is accepted with a 5% error level. This means that the overall model is significant at the 99% confidence level. Durbin-Watson statisticin also estimated in the regression is 2.75, hence the model doesn t have autocorrelation problem. Test results of the second hypothesis:' Table 3. shows the results of the second hypothesis variables Normality Heteroscedasticity Independent dependent Coefficient Prob(t) Significance level Statistics Significance level Statistics stock Returns exchange rates D.W : 2.75 Prob(F):0.000 R-Squared : 0.67 according to the table above, for the second hypothesis, least significant level for short-term interest rate is equal to that because this number is smaller than 5% error level, the null hypothesis based on this that variable is not meaningful is rejected and being significant variable hypothesis instead will be accepted. For long-term interest rates because least significance level of is obtained and is bigger than 5%, first hypothesis based on that a variable is significant is rejected and the null hypothesis based on the absurdity of variable will be accepted. With observe of a diagnostic test in the table above, the following results are obtained: (a) - LM statistic to detect residual normal distribution with words 0.63 and 0.72 the least significance level of the statistic is obtained. Considering 5 % error level and comparison with the minimum level of significance, the null hypothesis is accepted based on the normal distribution of residual terms. b - LM statistic to identify similarities or difference equal variances is equal to 2.29 and 0.13 least significance level of the statistic is obtained. Considering the 5% error level and comparison with the minimum significance level, the null hypothesis based on similarity variance is accepted and other hypothesis instead (difference variance) is rejected. The coefficient of determination (R2) is equal to 0.70, which represents the average of the dependent variable explained by the independent variable. The correlation coefficient is 0.83, which represents a full and direct relationship between exchange rates and bank stock returns. Fisher probability also is likely to 0.000, means that the overall model is significant at the 99% confidence level. Durbin-Watson statisticin estimated at the regression is equal to 2.14, hence the estimated model doesn t have the autocorrelation problem The third hypothesis tests results: a numerical quantity of Durbin-Watson statisticin shows lack of correlation between the variables in the model. Quantity computed of F statistic is significant at the 5% level, indicating that the overall model is significant. In addition, the explanatory power of the model is 99 percent. Before estimation of long time coefficients using ARDL, to ensure the long-term relationship between economic variables and the logarithm of stock returns, it is necessary that the co-integration tests done. To perform this test, the sum of the coefficients with the dependent variable intervals (BRI), deduce one from number and divided on the standard deviation. The computational statistics obtained -4.66, because this number in terms of absolute value is bigger than critical table of banerjee, dolado, and Mestre (- 4.05), so the null hypothesis, based on the lack of a long-term relationship is rejected, the result is that between the macroeconomic variables and index of stock returns, there is a long term relationship. Thus, the third hypothesis is accepted that there is accumulation relationship. The results of the estimated model is as follows: dependent variable Coefficient Bri(-1) EX(-1) CR(-1) 2.77 LB(-1) T D.W: 3.24 R 2 :0.99 Prob f: 0.05 Table4. Standard deviation Statistics t Prob Accordingly, long-term model using (ARDL) was estimated summary of the results is provided in the following table: 1005

5 variables EX CR LB T Table5. model ARDL long explanatory variable Coefficient Standard deviation t Statistics Prob according to t-statistic computed in above table, the coefficient of variables of exchange rates, shortterm interest rates and long term interest rates rise are significant at the 95 percent confidence level. In the long-term relationship the exchange rate and long-term interest rate has positive relationship, and short-term interest rate variable has negative relationship with stock return index. The interpretation coefficients of scalar quantity is that if in long term, variables of exchange rates and interest rates in the long term increase one hundred units, respectively, and 0.20 percent increase in the logarithm of stock returns. Also in the longterm, interest rates of short term to 3.91 percent rate cause reduction of the logarithm of stock returns index. Then, using the error correct model (ECM), we show that in each period, some percentage of imbalances of dependent variable is adjusted to long-term. below show the results of the test: Table6. Correction Model - ECM variables Coefficient Standard deviation t Statistics Prob Dbri Dex Dcr Dlb Dt Ecm(-1) According to test results, the coefficient of ECM (-1) is obtained equal to 3.40, which shows a high rate to remove short-term imbalance to the long-term equilibrium and show that in each period (season), 3.40 from the imbalance index of stock return to achieve a long-term balance is adjusted. CONCLUSIONS AND RECOMMENDATIONS Economic health of a country depends on financial health; banks are a very important part of a country's economical and financial system. The primary aim of this study was to investigate the relationship between bank stock returns and key economic variables such as exchange rates and short and long term interest rates. Influence of the independent variables indicate that an investor or buyer of stocks, how much is at risk to buy banks stock. Positive or negative effect helps the buyers in decision based on economic situation of the country. With respect to the foregoing matters, importance of research is clearer than ever before. On one hand, managers and financial analysts, according to survey results and taking into account the impact of currency exchange rate variable and short-and long-term interest rates on stock returns of banks can largely keep their balance in the stock market and do not loss in the changes of variables and to be able to increase efficiency of stock. Practical suggestions According to the results of the investigation and clarify the fact that each of the factors in this study to what extent influence on the Bank's stock, hence it is recommended to investors to check the amount of influence, and review the existing economic conditions in the country, do the appropriate and efficient investment in the stock banking industry. According to the results of the investigation and with respect to influence of exchange rate changes on bank stocks return, it is recommended to the Central Bank, by adopting the appropriate currency system prevents sudden increase in the exchange rate in the short term. According to the results obtained, it is recommended the reducing interest rates policy be taken and as short-term interest rate has the reverse relationship with the stock returns, it is better to adopt appropriate policies to control it. Suggestions for future research It is recommended for future research to investigate the impact of other macroeconomic variables on bank stock returns of the Tehran Stock Exchange. 1006

6 Also, for future research, it is recommended that independent research variables and other macroeconomic variables, their impact on the efficiency of each of the financial institutions and leasing are examined. The study of long- term interest rates have been used for a year, it is recommended in order to further research in this area other rates can be used. REFERENCES Abdol Rahman A, Tafri F, sidek N Macroeconomic determinants of Malaysian Stock market, African Journal of Business Management, Vol.3, pp Anokye A, Twene M, boah George P Do Macroeconomic Variables Play any Role in the Stock Market Movement in Ghana?, MPRA, Paper No.9357,. Azar A, Momeni M Statistics and its Applications in Management (Eighth Edition) Samt publication, Tehran. Chang Do Macroeconomic Variables Have Regime-Dependent Effects on Stock Return Dynamics? Evidence from the Markov Regime Switching Model, Economic Modeling, Vol. 26, Issue 6, pp Davaniy Gh stock, stock and stock pricing, Tehran, Tasvir Hosseini SGhA Examine the relationship between market returns, oil prices, exchange rates, interest rates with stock returns for each industry separately, in Tehran Stock Exchange, MS Thesis, University of Sistan and Baluchestan, Department of Accounting. Ismaili Sh The relationship between profit quality and stock returns, master's thesis, Allameh Tabatabai University, Department of Accounting and Management. Motamedi S examine effect of oil price and the exchange rate on stock price index of Tehran Stock Exchange, MS Thesis, Shahid Chamran University of Ahvaz, Faculty of Social and economical Science. Musaii M, Mehregan N, Amiri H relation of stock market and macroeconomic variables in Iran, Journal of Economic Policies, Year 18, No. 54, pp Robert D, Gay Jr Nova Southeastern University, Effect of Macroeconomic Variables on Stock Market Returns For Four Emerging Economies: Brazil, Russia, India, And China, International Business & Economics Research Journal, March. Volume 7, Number 3.pp Sajjadi SH, Farazmand H, Ali Sufi H The relationship between macroeconomic variables and the stock return index in Tehran Stock Exchange, Journal of Economic Sciences, Year 10, No. 2 (39), pp ; the second half. Tashkyny A econometrics applied to Microfit, Cultural and Artistic Institute of dibagaran, Tehran. 1007

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