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                                                                                                 # 4 (130) ³åñÇÉ 2011                                                 45

                                                                                    Table 4:       5. Conclusion
 Result of Granger Causality Test                                                                  According to the result of empirical study, we conclude that
                           Null Hypothesis                           F-Statistic   Probability
              Iran GDP dos e not Granger causing TEDP IX              3.03050       0.19461
                                                                                                 GDP of our sample country don’t have Granger Causality relation-
      United K ingdom GDP dos e not Granger causing FTSE 100          7.88946       0.06061      ship with their Stock Exchanges.
         Turkey GDP dose not Granger caus ing ISE 100 Index           0.96533       0.53317
             Japan GDP dose not Granger causing TOPIX                 2.53924       0.23496
     P hilippine GDP dose not Granger caus ing PSE Index (PSEi)       10.6205       0.08790
     Malaysia GDP dose not Granger causing FBM Emas Index             0.25047       2.38566
  Indonesia GDP dose not Granger caus ing JSX Composite Index         3.63634       0.15862                           1. Filer Randall, Henhouse Jan, and Canpos Naeuro,
Aus tralia GDP dos e not Granger causing Australian Stock Exchange    3.09045       0.19047               Do Stock Market Promote Economic Growth, Working Paper from
    Canada GDP dose not Granger causing S&P/TSX Composite             1.00527       0.51924
                                                                                                                                     the Center for Economic Research and
          USA GDP dos e not Granger causing NYSE Euronext             1.34628       0.42016
                                                                                                                              Graduate Education- Economic Institute, 2000.
on them. The test result is shown in table3.                                                                             2. Geo Liang Ping, Liu Si-Feng Mi, and Chuan Min,
   As table 3 shows the Dickey Fuller augmented statistic values of                                           Empirical study on relationship between GDP and stock index:
                                                                                                      Based on the degree of gray incidences, International conferences on
series with lag 0 are smaller than test critical values of series at 1%
                                                                                                    information and automation, December 15-18, 2005 Colombo, Srilanka.
level, 5% level and 10% level. From the previous tests, it can be                                             3. Leigh Lamin, Stock market equilibrium and macroeconomic
concluded that series are integrated of order one, I(1).                                                                       fundamentals, Working Paper from IMF, 1997.
   II. Granger Causality Test                                                                      4. Levin Ross and Zervos Sara, Stock market development and long-run
   In this paper we carry out Granger Causality Test with lag length                                     growth, World Bank Economic Review, Vol. 10, #2, 323-339, 1996.
3.the result are shown in table 4.                                                                 5. Modis Theodore, Sunspots, GDP and the stock market, Technological
   According to table 4, to reject the null hypothesis that GDP dose                                                   forecasting and social change, 74 (2007) 1508-1514.
not granger cause stock exchange indexes.                                                                 6. Poon Ser-huang and Tylor Stephen, Stock returns and volatility:
                                                                                                                                  an empirical study of the UK stock market,
   They indicate that the probability that GDP dose not granger
                                                                                                               Journal of banking and finance, Vol. 107, #5, 402-437, 1992.
causing indexes are too great to reject the null hypothesis.                                                              7. World Bank reports fir GDP,
Therefore there are no granger causality relationship between                                                                            8. World Federation of Exchanges,
GDP growth and index growth.                                                                                         Annual reports, available at:

        his paper examines whether stock index and exchange                                      rates as one of the main determinants of business profitability
        rates are related to each other or not. The variables are                                and equity prices (Kim, 2003).
        Tehran stock index of Iran, market capitalization of Armenia                                The relationship between stock prices and exchange rates has
NASDAQ OMX and exchange rate of both countries.                                                  preoccupied the minds of economists since they both play important
   The study uses monthly data on two Asian countries, including                                 roles in influencing the development of a country’s economy.
Iran and Armenia, for the period January 2006 to Mars 2011 for                                      Also this issue, have received considerable attention after the
Armenia and April 2002 to Mars2011 for Iran. We employed stan-                                   East Asian crises. During the crisis          countries affected in both
dard Granger causality tests to examine association between stock                                currency and stock markets. If stock prices and exchange rates are
indices and exchange rates. The results of this study show no                                    related and the causation runs from exchange rates to stock prices,
Granger Casualty between the said variables for every country.                                   then crises in the stock markets can be prevented by controlling the
   Keywords: Stock exchange, Exchange rate stock index, market                                   exchange rates. Moreover, developing countries can exploit such a
capitalization, Granger Causality                                                                link to attract or stimulate foreign portfolio investment in their own
                                                                                                 countries. Similarly, if the causation runs from stock prices to
  I. Introduction
                                                                                                 exchange rates, then authorities can focus on domestic economic
   Knowledge of the factors that influence the behavior of stock
                                                                                                 policies to stabilize the stock market. If the two markets are related,
indices and exchange rates has attracted the attention of econo-
mists, policy makers, and the investment community for a long                                    then investors can use this information to predict the behavior of
time. This is especially noteworthy since 1973 when the many                                     one market, using the information on other market. It means that
countries in the world adopted freely floating (or managed floating)                             Investors can use this information for speculation and to hedge their
rate systems.                                                                                    return on foreign investment.
   Many factors, such as enterprise performance, dividends,                                          The main purpose of the present study is to complement the
stock prices of other countries, gross domestic product,                                         existing literature on the stock market – macroeconomic nexus in
exchange rates, interest rates, current account, money supply,                                   two respects. First, is to determine whether stock indices are a lead-
employment, their information etc, have an impact on daily stock                                 ing indicator for future Exchange Rate or vice versa and second to
prices (Kurihara, 2006). Especially, the continuing increases in                                 exam the informational market efficiency about exchange rate in
the world trade and capital movements have made the exchange                                     Iran and Armenia.

Thesis theme:
Revealing co-movements of financial
markets in iran and armenia in a                                                                                                                         BASHIRI
consequence of processes occurring in
the world financial markets                                                                                                             Student of PHD
Scientific supervisor:
                                                                                                                      Course in Yeravan state university
Miqayel HOVSEPYAN                                                                                                           department of International
Doctor of economical sciences,                                                                                         economics faculty of economics
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                                                                                        Table 1:        rate. On the other hand, negative causal relationship
 Unit Root Test
                                                                Tes t Critical Values
                                                                                                        from exchange rate to all stock market indices is deter-
                 Series                    ADF                                               10%        mined (Aydemir and Demirhan, 2009).
                                                           1% level     5% level
                                                                                             level            Adjasi determined whether movements in
             Exchange                                                                                   exchange rates have an effect on stock market in
         Rate(USD:AMD)                 -6.190179         -4.198503        -3.523623         -3 .192902
                                                                                                        Ghana. The Exponential Generalised Autoregressive
                                                                                            -3 .192902 Conditional Heteroskedascity (EGARCH) model was
    NASDAQ OMX mark et
                                       -5.909714         -4.198503        -3.523623
                                                                                                        used in establishing the relationship between
         Rate(USD:IRR)                 -17.07368         -4.049586        -3.454032         -3 .152652 exchange rate volatility and stock market volatility. It
                                                                                                        was found that there is negative relationship between
    Tehran Stock Exchange
                                       -9.815927         -4.049586        -3.454032         -3 .152652 exchange rate volatility and stock market returns
                                                                                                        depreciation in the local currency leads to an increase
                                                                                               Table 2: in stock market returns in the long run; where as in the
 Unit Root Test - order one, I(1)
                                                                                                        short run it reduces stock market returns. Additionally,
                                                                     Test Critical Values
                Series                  ADF                                                             there is volatility persistence in most of the macroeco-
                                                        1% level       5% level             10% level
  Exchange Rate(USD:AMD)
                                   -1.803939          -3.565430         -2.919952             -2.597905
                                                                                                        nomic variables; current period’s rate has an effect on
                                                                                                        forecast variance of future rate (Adjasi, 2008).
    NASDAQ OMX market
                                   -0.871605          -3.565430         -2.919952             -2.597905    In a paper, Desislava Dimitrova studied if there is a
   Exchange Rate(USD:IRR)                                                                               link between the stock market and exchange rates that
                                   -2.235214          -3.494378         -2.889474             -2.581741
                                                                                                        might explain fluctuations in either market. He make
    Tehran Stock Exchange
                                   -2.279046          -3.494378         -2.889474             -2.581741 the case that, in the short run, an upward trend in the
                                                                                                        stock market may cause currency depreciation,
 Results of long run Causality                                                                Table 3: whereas weak currency may cause decline in the
                                                                                                        stock market. To test these assertions, he used a mul-
                             Null Hypothesis                              F-Statistic     Probability
                                                                                                        tivariate, open-economy, short-run model that allows
    Iran Stock Index dose not Granger causing Exchange rate of Iran        0.78281          0.55996     for simultaneous equilibrium in the goods, money, for-
    Exchan ge rate of Iran dose not Granger causing Iran Stock Index       0.55543          0.57562     eign exchange and stock markets in two countries.
   Armenia market capitalization dose not Granger causing Exchan ge        1.85813          0.17061     Specifically, this paper focused on the United States
                             rate of Armenia                                                            and the United Kingdom over the period January 1990
  Exchange rate of Armenia d ose not Granger causing Armenia market        0.11320          0.89329
                                                                                                        through August 2004. It found support for the hypoth-
                                                                                                        esis -that a depreciation of the currency may depress
     II. Literature review                                                               the stock market—the stock market will react with a less than one
     Over the past few decades, determining the effects of macroeco- percent decline to a one percent depreciation of the exchange rate.
 nomic variables on stock prices and investment decisions has pre- This also implies that an appreciating exchange rate boosts the
 occupied the minds of economists, therefore in the literature; there stock market (Dimitrova, 2005).
 are many empirical studies to disclose the relationship between                            Another paper investigates the nature of the causal relationship
 macroeconomic variables such as interest rate, inflation, exchange between stock prices and macroeconomic aggregates in the for-
 rates, money supply, oil price, gold price etc and stock indices. eign sector in India. It tests the causal relationships between the
 However, the direction of causality still remains unresolved in both BSE Sensitive Index(stock exchange) and the three macroeconom-
 theory and empirics. In this part we will explain some Previous ic variables, exchange rate, foreign exchange reserves and value of
 Empirical Studies about this subject.                                                   trade balance using monthly data for the period 1990-91to 2000-01.
     The first study has done by Gopalan Kutty and has examined the The results suggest that there is no causal linkage between stock
 relationship between stock prices and exchange rates in Mexico. prices and the three variables under consideration (Bhattacharya
 The stock index data for this study is obtained from Dow Jones and Mukherjee, 2001).
 News/Retrieval provided by Dow Jones. It consists of weekly clos-                          Naeem Muhammad and Abdul Rasheed, study four South Asian
 ing of Bolsa, Mexico’s equity index, a market capitalization weight- countries, including Pakistan, India, Bangladesh and Sri- Lanka, for
 ed index of the leading 35-40 stocks. Mexican Peso per US dollar the period January 1994 to December 2000. The results of this
 starting from the first week of January 1989 to the last week of study show no short-run association between the variables for all
 December 2006 was obtained from the International Monetary four countries. There is no long-run relationship between stock
 Market. After eliminating some of the incompatible data, a total of prices and exchange rates for Pakistan and India as well. However,
 849 data points were generated. The Granger causality test shows for Bangladesh and Sri-Lanka there appear to be a bi-directional
 that stock prices lead exchange rates in the short run, and there is causality between these two financial (Muhammad and Rasheed,
 no long run relationship between these two variables. This finding 2000).
 corroborates the results of Bahmani-Oskooee and Sohrabian’s con-
 clusion, but contradicts the findings of other studies which reported                      III. Methodology and Data:
 a long term relationship between exchange rates and stock prices                           In this study we use monthly data of Exchange rate and Stock
 (Kutty, 2010) and (Bahmani 1992).                                                 Exchange performance for the period Jun 2006- Mar2011for
     In other study Aydemir and Demirhan investigate the causal rela- Armenia and Apr2002-Mar2011 for Iran. In this study we consider
 tionship between stock prices and exchange rates, using data from the US Dollar monthly average price as exchange rate and Tehran
 23 February 2001 to 11 January 2008 about Turkey. The reason of stock index as Iran Stock Exchange indicator. We also employ
 selecting this period is that exchange rate regime is determined as NASDAQ OMX market capitalization as the indicator of Armenia
 floating in this period. In this study, national 100, services, financials, capital market.
 industrials, and technology indices was taken as stock price indices.                      Traditionally to test for the causal relationship between two vari-
 The results of empirical study indicate that there was bidirectional ables, the standard Granger (1969) test has been employed in the
 causal relationship between exchange rate and all stock market relevant literature. This test states that, if past values of a variable Y
 indices. While the negative causality exists from national 100, serv- significantly contribute to forecast the value of another variable Xt+1
 ices, financials and industrials indices to exchange rate, there is a then Y is said to Granger cause X and vice versa. The main step for
 positive causal relationship from technology indices to exchange starting is to check for the stationarity of the original variables and
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                                                                           # 4 (130) ³åñÇÉ 2011                                                      47

then test co-integration between them. According to Granger, the           ation and the Exchange rate in both countries.
test is valid if the variables are not co-integrated (Granger, 1986).At       Stock market in Iran and Armenia are still in a transitory phase. If
first we started with unit root test.                                      these results are also arrived at for more subsequent periods, then
    1/ Unit Root Test                                                      it may be concluded that Iranian and Armenian stock market are
    Empirical studies (for example, Engle and Granger, 1987) have          approaching towards informational efficiency at least with respect to
shown that many time series variables are non-stationary or inte-          one macroeconomic variable, which is exchange rate.
grated of order 1 (i.e., their changes are stationary). The time series
variables considered in this paper are the stock Index of Tehran
Stock Exchange and Armenia capital market(NAZDAQ OMX) and
two macroeconomic variables namely, exchange rates(for Iran and
Armenia). In order to avoid a spurious regression situation the vari-
ables in a regression model must be stationary or co-integrated.
Therefore, in the first step, we perform unit root tests on these four
time series to investigate whether they are stationary or not. The
Augmented Dickey-Fuller (ADF) unit root test is used for this pur-
    If the calculated ADF statistics are less than their critical values
from Fuller’s table, then the null hypothesis (H0) is accepted and the
series are non-stationary or not integrated of order zero.
    Usually stock exchange indices are non stationary. In the second
step we estimate co-integration regression using variables having
the same order of integration.
    The null hypothesis of non-stationary is rejected if the calculated
ADF statistics is less than the critical value from Fuller’s table. That
means there is a long run stable relationship between the two vari-
ables and causality between them is tested by the error correlation
model. On the other hand, if the null hypothesis of non-stationary is
rejected and the variables are not co-integrated then the standard
Granger causality test is appropriate.

  IV. Empirical Results:
   As our first step, we have determined the order of integration for
each of the four variables used in the analysis. Using the standard
Augmented Dickey Fuller unit root test analyzed in the earlier sec-
tion, we have tested on levels, zero and first differences of the
series. The results are tabulated in Table 1 and Table2.
   As table 2 shows the Dickey Fuller augmented statistic values of
series are smaller than test critical values of series at 1% level, 5%                                                                      References:
level and 10% level. From the previous tests, it can be concluded                                                1. Adjasi C.K.D. and B.N. Biekpe (2008),
                                                                              Stock Market Returns and Exchange Rate Dynamics in Selected African
that series are integrated of order one, I(1).                                                                              Countries: A bivariate analysis,
   The test results in table 3 suggest that we fail to reject the null                      The African Finance Journal, July, Cape Town, South Africa.
hypothesis of Granger non-causality from exchange Rate to                    2. Aydemir O. and E. Demirhan (2009), The Relationship between Stock
exchange index and exchange capitalization in both country at 5%           Prices and Exchange Rates, Evidence from Turkey, International Research
                                                                                                                    Journal of Finance and Economics 23.
level of significance. The results suggest that Iran Stock Index and                3. Bahmani-Oskooee M. and A. Sohrabian (1992), Stock Prices and
Armenia market capitalization neither leads their Exchange Rate.                  the Effective Exchange Rate of the Dollar, Applied Economics 24 (4).
   This implies that the stock market cannot be used as a leading           4. Bhattacharya B. and J. Mukherjee (2001), Causal relationship between
indicator for future growth in exchange rate in two countries and vice          stock market and exchange rate, foreign exchange reserves and value
                                                                                                                  of trade balance: a case study for India.
versa.                                                                        5. Dimitrova D. (2005), The Relationship between Exchange Rates and
                                                                                     Stock Prices: Studied in a Multivariate Model, Political Economy14.
  V. Conclusion                                                                       6. Engle R.F. and C.W.J. Granger (1987), Co integration and error
   The efficient market hypothesis (EMH) was formalized by Fama                    correction: Representation, estimation and testing, Econometrica 55.
(1970). The hypothesis suggests that changes in the macroeco-                                               7. Fama E. (1981), Stock returns, real activity,
nomic variables cannot be used as a trading rule by investors to                                    inflation and money, American Economic Review 71.
                                                                              8. Granger C.W.J. (1969), Investigating causal relations by econometric
earn consistently abnormal profits in the stock market. In an efficient                           models and cross spectral methods, Econometrica 37.
market, current as well as past information on the growth of these                                       9. Granger C.W., Huang B., and Yang C. (2000),
variables are fully reflected in asset prices so that investors are                                                    A Bivariate Causality between Stock
unable to formulate some profitable trading rule using the available                      Prices and Exchange Rates: Evidence from Recent Asian Flu,
                                                                                                   The Quarterly Review of Economics and Finance 40.
                                                                                              10. Kim K. (2003), Dollar Exchange Rate and Stock Price:
   We wanted to determine the lead relationships between the                                                     Evidence from Multivariate Co integration
Armenia and Iran stock market and their Exchange Rate. This is a                         and Error Correction Model, Review of Financial Economics 12.
famous sentence that stock exchange is a barometer of economy.                   11. KuriharaY. (2006), The Relationship between Exchange Rate and
We also endeavor to investigate such question in one aspect of                              Stock Prices during the Quantitative Easing Policy in Japan,
                                                                                                                  International Journal of Business 11 (4).
macroeconomic variable: Can the Iranian and Armenian stock mar-                      12. Kutty G. (2010), The relationship between exchange rates and
ket act as a barometer for their economy? This is of course an                                                            stock prices: the case of Mexico,
empirical question. To test this hypothesis, we employed the                            North American Journal of Finance and Banking Research 4 (4).
methodology of Granger Causality for the sample period. The                    13. Muhammad N. and A. Rasheed (2000), Stock Prices and Exchange
results suggest that there is no causal linkage between stock oper-                      Rates: Are they related? Evidence from South Asian Countries.

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