Chapter

Stock Market Operation and Equity Price Determination in an Economy with an Interest-Free Banking System: The Case of Iran

Karim Eslamloueyan

in Islamic Perspectives on Wealth Creation

Published by Edinburgh University Press

Published in print May 2005 | ISBN: 9780748621002
Published online March 2012 | e-ISBN: 9780748653096 | DOI: http://dx.doi.org/10.3366/edinburgh/9780748621002.003.0013
Stock Market Operation and Equity Price Determination in an Economy with an Interest-Free Banking System: The Case of Iran

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This chapter applies the Autoregressive Distributed Lag model to examine the stock price movements in the Tehran Stock Exchange (TSE) after the introduction of Islamic banking in the country. It concludes that domestic and international interest rate differentials are not important determinants of stock prices in the TSE due to restrictions on capital mobility and the implementation of the non-interest banking system in Iran. In the short run, stock prices are positively affected by their lagged value, current prices of foreign goods and exchange rates. Industrial production, the lagged values of domestic and foreign goods, and a lagged exchange rate inversely affect stock prices, whereas the current level of domestic goods' prices has no impact. In the long run, the production level of large manufacturing companies and the price levels of domestic and foreign goods are negatively related with stock prices, while the exchange rate has no impact. The results of the error correction model show that about 26 per cent of deviation of the stock price from its long-run equilibrium path is corrected each period.

Keywords: Autoregressive Distributed Lag; Tehran Stock Exchange; Islamic banking; Iran; stock prices; interest banking system

Chapter.  4223 words.  Illustrated.

Subjects: Society and Culture

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