Dynamic relationships between financial conditions index and stock returns
Stock return predictability has been extensively considered as a stylized reality. Theories indicate that returns should change along the time, and various studies have presented evidence on this point. On the other hand, there is an optimal portfolio in each regime, and one cannot claim that a spec...
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| Format: | Article |
| Language: | English |
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Iran Finance Association
2020-01-01
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| Series: | Iranian Journal of Finance |
| Subjects: | |
| Online Access: | https://www.ijfifsa.ir/article_113334_ac4dad0386aa749aff59d6990c1cb91a.pdf |
| _version_ | 1811322426658652160 |
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| author | Amin Sadat Ebrahim Abbasi Hasan Ghalibaf Asl |
| author_facet | Amin Sadat Ebrahim Abbasi Hasan Ghalibaf Asl |
| author_sort | Amin Sadat |
| collection | DOAJ |
| description | Stock return predictability has been extensively considered as a stylized reality. Theories indicate that returns should change along the time, and various studies have presented evidence on this point. On the other hand, there is an optimal portfolio in each regime, and one cannot claim that a specific portfolio can minimize risk and returns in each regime. On the other hand, the financial conditions index (FCI) is an important index to specify monetary policy conditions. Regarding the importance of the issue, this research aims to present a comprehensive index, including all monetary transmission mechanisms. In this regard, it is attempted to improve the efficiency of stock return predictability in Iran's economy by incorporating an FCI and identifying relationships between FCI and stock returns using the TVP-DMA model, which can resolve shortcomings of traditional models. The study is applied research in terms of purpose. Seasonal data over the period of April 1991 to July 2019 is used. The results based on TPV, DMS, and DMA models indicate that liquidity growth rate, economic growth rate, unemployment rate, exchange rate, financial condition index, oil revenues, misery index, and budget deficit, has significantly affected factors of stock returns in 30, 50, 11, 49, 66, 54, 7, and 84 periods of 104 periods, respectively. Accordingly, budget deficit, financial condition index, oil revenues, and economic growth are the most effective factors of stock returns predictability in Iran. Further, the incorporation of flexibility in coefficients of the financial development index leads to higher forecast accuracy. |
| first_indexed | 2024-04-13T13:34:49Z |
| format | Article |
| id | doaj.art-9b907a64f6de4eafba0bd5e41770dc71 |
| institution | Directory Open Access Journal |
| issn | 2676-6337 2676-6345 |
| language | English |
| last_indexed | 2024-04-13T13:34:49Z |
| publishDate | 2020-01-01 |
| publisher | Iran Finance Association |
| record_format | Article |
| series | Iranian Journal of Finance |
| spelling | doaj.art-9b907a64f6de4eafba0bd5e41770dc712022-12-22T02:44:48ZengIran Finance AssociationIranian Journal of Finance2676-63372676-63452020-01-014112414510.22034/ijf.2020.234560.1137113334Dynamic relationships between financial conditions index and stock returnsAmin Sadat0Ebrahim Abbasi1Hasan Ghalibaf Asl2Ph.D. Candidate of Department of Financial Management, Qazvin Branch, Islamic Azad University, Qazvin, Iran.Prof., Department of Finance and Insurance, Faculty of Management, Alzahra University, Tehran, Iran.Prof., Department of Finance and Insurance, Faculty of Management, Alzahra University, Tehran, Iran.Stock return predictability has been extensively considered as a stylized reality. Theories indicate that returns should change along the time, and various studies have presented evidence on this point. On the other hand, there is an optimal portfolio in each regime, and one cannot claim that a specific portfolio can minimize risk and returns in each regime. On the other hand, the financial conditions index (FCI) is an important index to specify monetary policy conditions. Regarding the importance of the issue, this research aims to present a comprehensive index, including all monetary transmission mechanisms. In this regard, it is attempted to improve the efficiency of stock return predictability in Iran's economy by incorporating an FCI and identifying relationships between FCI and stock returns using the TVP-DMA model, which can resolve shortcomings of traditional models. The study is applied research in terms of purpose. Seasonal data over the period of April 1991 to July 2019 is used. The results based on TPV, DMS, and DMA models indicate that liquidity growth rate, economic growth rate, unemployment rate, exchange rate, financial condition index, oil revenues, misery index, and budget deficit, has significantly affected factors of stock returns in 30, 50, 11, 49, 66, 54, 7, and 84 periods of 104 periods, respectively. Accordingly, budget deficit, financial condition index, oil revenues, and economic growth are the most effective factors of stock returns predictability in Iran. Further, the incorporation of flexibility in coefficients of the financial development index leads to higher forecast accuracy.https://www.ijfifsa.ir/article_113334_ac4dad0386aa749aff59d6990c1cb91a.pdffinancial development indexmonetary conditions indexstock returnstvp-dma |
| spellingShingle | Amin Sadat Ebrahim Abbasi Hasan Ghalibaf Asl Dynamic relationships between financial conditions index and stock returns Iranian Journal of Finance financial development index monetary conditions index stock returns tvp-dma |
| title | Dynamic relationships between financial conditions index and stock returns |
| title_full | Dynamic relationships between financial conditions index and stock returns |
| title_fullStr | Dynamic relationships between financial conditions index and stock returns |
| title_full_unstemmed | Dynamic relationships between financial conditions index and stock returns |
| title_short | Dynamic relationships between financial conditions index and stock returns |
| title_sort | dynamic relationships between financial conditions index and stock returns |
| topic | financial development index monetary conditions index stock returns tvp-dma |
| url | https://www.ijfifsa.ir/article_113334_ac4dad0386aa749aff59d6990c1cb91a.pdf |
| work_keys_str_mv | AT aminsadat dynamicrelationshipsbetweenfinancialconditionsindexandstockreturns AT ebrahimabbasi dynamicrelationshipsbetweenfinancialconditionsindexandstockreturns AT hasanghalibafasl dynamicrelationshipsbetweenfinancialconditionsindexandstockreturns |