Can strengthening the stock market affect the value of the national currency? A study of stock-oriented models in the Iranian economy

Abstract

Objective: The stock market and the foreign exchange rate market have been sensitive segments of the financial market. These two markets are rapidly affected by fluctuations and business cycles in the economy and quickly reflect the economic change. At the same time, turmoil in one or both markets raises concerns among market policymakers. We also address the question of whether the national currency can be strengthened through the stock market.Methods: This study examines the stock market price on the value of the national currency of Iran using stock-oriented models and the Markov switching method in the period 1995 to 2021. In this study, the non-linear Markov switching method was used to estimate the model, and the LR- test method was used to check the linearity or non-linearity of the models. Akaike's test has also been used to determine the number of Markov switching regimes.Results: The research results show that for every one percent increase in stock prices, the exchange rate has decreased by 0.21 percent. Therefore, the results indicate the approval of stock-oriented models in the Iranian economy. In other words, the capital market is one of the determinants of the exchange rate.Conclusions: According to this model, lower stock prices reduce the wealth of domestic investors, which leads to lower demand for money with lower interest rates. Lower interest rates cause capital outflows to overseas markets, assuming other conditions remain stable, causing the domestic currency to depreciate and the exchange rate to rise.

Keywords

• stock market
• national currency value
• stock-oriented models
• iran