Investigation of the Asymmetric Impacts of Real Exchange Rate Shocks on Total Equity Price Index (TEPIX) in Iran (A Gregory-Hansen Co-Integration Approach)

The stock exchange as a main pillar of capital market can de facto mobilize the idle and ineffective savings in the country and conduct them towards more production and eventually expedite their momentum to well articulated growth and development in toto. Since the value of shares listed in the stock exchange, may de jure be affected by various factors particularly the macroeconomic variables, in this paper an attempt is made to expound the asymmetric impact of real exchange rate on total Equity Price Index (TEPIX), Ipso facto. For this purpose, we have applied the monthly data of oil price, CPI and real exchange rate for the study period of 2003:1-2014:12. Similarly to estimate and capture the positive and negative effects of real exchange rate shocks, we have used the Hodrick-Prescott Filter tool. Subsequently, we run the Zivot and Andrews unit root test to specify the endogenous structural breaks of explanatory variables and also we have utilized the Gregory-Hansen Co-Integration test, to investigate the long term relations between the real exchange rate shocks and TEPIX in context to the Iranian economy with special emphasize on structural changes of concerned variables and hereupon, we have estimated the model viz-a-viz executing the Dynamic Ordinary Least Square (DOLS) method. The results of this study prima facie indicate that the effects of long term real exchange rate shocks on TEPIX are asymmetric, so that, the positive real exchange rate shock bears a positive and significant impact on TEPIX, while the negative shock carries a negative but significant effect on TEPIX, pro rata. However, the other explanatory variables i.e. oil price and Consumer Price Index (CPI) constitute the long term negative, though significant impact on TEPIX, Sine qua non.