Examining the Impact of Islamic Treasury Bill Yields on Iran’s Capital Market Returns Using the Quantile on Quantile Connectedness Model

Objective
The capital market is one of the main pillars of a country’s economy, playing a key role in pooling funds and optimizing resource allocation. This market provides a platform for financing economic enterprises and contributes to the country’s economic growth and development. Among the factors influencing the capital market, changes in the yield to maturity (YTM) of Islamic Treasury Bonds (ITBs)—a risk-free financial instrument—can significantly impact investment flows. This study aims to investigate the relationship between changes in the YTM of ITBs and the returns of both the total and equal-weighted indices of the Tehran Stock Exchange (TSE) and Iran Fara Bourse (IFB). The central research question is whether an increase in the YTM of ITBs leads to a decline in the returns of capital market indices, and how this relationship varies under different economic conditions.
 
Methods
To address the research question, the Quantile-on-Quantile Connectedness model was employed, allowing for the examination of asymmetric and varying relationships across different quantiles of the variables' distributions. The data used in this study include the YTM of ITBs issued during three periods: the Iranian calendar years 1393 (2014/15), 1397 (2018/19), and 1400 (2021/22), along with the returns of the TSE total index, TSE equal-weighted index, IFB total index, and IFB equal-weighted index. The analysis was conducted using monthly data, focusing on different quantiles of changes in YTM and index returns. Additionally, the impact of crisis periods, such as the economic fluctuations observed in late 1402 (2023/24), was incorporated into the analysis.
 
Results
The results indicate that the relationship between changes in the YTM of ITBs and the returns of the TSE and IFB indices is significantly asymmetric across the upper and lower quantiles of the distribution. During the Iranian calendar year of 1400 (2021/22), this relationship predominantly flowed from changes in the YTM of ITBs to the index returns. Furthermore, with the upward trend in the YTM of ITBs in late 1402 (2023/24), coinciding with declining index returns, the intensity of this asymmetric relationship increased. These findings suggest that a rise in the YTM of ITBs can attract investors to these bonds and exacerbate selling pressure in the capital market. Conversely, during the years of 1393 (2014/15) and 1397 (2018/19), the direction of the relationship was reversed, with the returns of the TSE and IFB indices exerting greater influence on the YTM of ITBs. This indicates that under normal or non-crisis conditions, the YTM of ITBs has less impact on the capital market and is more influenced by fluctuations in market indices.
 
Conclusion
The findings demonstrate that during periods of crisis and declining capital markets, an increase in the YTM of ITBs can intensify the downward trend in the capital market. Conversely, under normal economic conditions, the impact of the YTM on the capital market is more limited. Based on these results, it is recommended that the Central Bank and other economic policymakers adjust policies related to interest rates and treasury bonds to prevent extensive capital shifts to risk-free bonds and the subsequent reduction in capital market investments. Additionally, policies aimed at enhancing the attractiveness of the capital market by facilitating financing processes and reducing costs for enterprises are essential. Finally, continuous monitoring of the relationship between the YTM of ITBs and capital market returns using advanced predictive and analytical models can help identify and prevent potential crises. These measures can maintain equilibrium in the capital market and contribute to sustainable economic growth.