Dynamic Relationship between Exchange Rate and Tehran Stock Exchange Index Using Multivariate GARCH Model

This paper empirically analyzes the dynamic relationship between real effective exchange rate and stock index applying VAR and multivariate generalized autoregressive conditional heteroskedasticity (GARCH) models. Doing so, we have used the monthly data from Tir1371 to Tir1389. The results show that there is not any significant long-term equilibrium relationship between real effective exchange rate and the stock price. Furthermore the paper examines the cross-volatility effects between foreign exchange and stock markets. The results indicate that both variables have been affected by their own volatility directly and indirectly, but each market has not been affected significantly by the other market. Due to the low degree of simultaneous-varying co-volatility among these markets, investors will be likely to benefit from risk reduction if they diversify their financial portfolio with stocks and currency exchange