Examining the Impact of Inflation on Stock Market Returns in the Tehran Stock Exchange: A Time-Varying Parameter and Regime-Switching Approach

Document Type : Research Paper

Authors

1 Associate Prof., Department of Economic, Faculty of Economics and Management, Tabriz University, Tabriz, Iran.

2 PhD., Department of Economic, Faculty of Economics and Management, Tabriz University, Tabriz, Iran.

3 Prof., Department of Economic, Faculty of Economics and Management, Tabriz University, Tabriz, Iran.

4 PhD Candidate, Department of Economic, Faculty of Economics and Management, Tabriz University, Tabriz, Iran.

10.22059/frj.2025.365960.1007517

Abstract

Objective
One of the most important topics in economics is the impact of the stock market on economic growth and development. By providing liquidity to companies, the stock market facilitates long-term investment in projects, thereby promoting economic growth. Along with the role of an efficient stock market in economic progress and development, economic stability and low inflation are also considered very important factors for economic development. Although these two factors influence economic development, they also interact with each other. While inflation disrupts investment and economic growth, it can stimulate the stock market and increase its yield in line with inflation. In addition, inflation can weaken the stock market by strengthening other asset markets such as currency, housing, and gold. Therefore, studying inflation's effects on the stock market can be very useful in understanding the role played by the stock market in Iran's economy. This research is to investigate the impacts of inflation on the stock market and to determine the debate under which inflationary regime the stock market has the most returns. The analysis of Iran's inflation shows that in the 1390s, various economic and political shocks caused different inflationary regimes to prevail in the country, each having different effects on the stock market.
 
Methods
To investigate the effects of inflation on the performance of the Tehran Stock Exchange market in the period of 1390-1400, in the form of monthly data, this study has used two methods, Markov-Switching Vector Autoregressive and time-varying parameters. The main advantage of both methods used is their non-linearity. Comparing the results of two methods can guide economic officials in making the right policy.
 
Results
The results of Markov switching show that extremely high inflation first causes a sharp increase in stock market returns, but its lags severely weaken returns. Also, low inflation, despite the low impact factor compared to high inflation regimes, generally leads to the strengthening of the stock market. In order to check the robustness of the results, the present study has used the time variable parameter method. The results of this method indicate that in the period of 1392-1395, when the inflation rate was low and stable, the stock market yield had a high positive reaction compared to other periods.
 
Conclusion
This research, using these two methods, shows that low and stable inflation has a significant impact on strengthening stock market returns. Therefore, the important reason for the low efficiency of the stock market of the Iranian economy can be mentioned as a result of severe inflation. Just as inflation has caused economic instability, it has slowed economic growth by disrupting investment, fostering speculation, and turning the stock market into an unproductive arena focused on short-term profits. Therefore, controlling inflation is necessary to correct and rationalize market efficiency.

Keywords

Main Subjects

References

 
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Financial Research Journal
Volume 27, Issue 4
2025
Pages 848-876

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