This paper is an attempt to investigate the impacts of macroeconomic variables on capital market in Iran using quarterly observations for the period 1991Q2 to 2007Q1. The macroeconomic variables considered in the model include GDP, prices, money and exchange rate. Arbitrage pricing theory is considered to model the variables. Standard unit root tests are conducted to investigate the order of integration in time series used in the study. Cointegration analysis is employed to estimate the model. More specifically, the autoregressive distributed lag (ARDL) framework and error correction model (ECM) are employed.
The results show that stock price has a positive effect on GDP and price level, but a negative effect on money stock and exchange rate. The estimated coefficient of the error correction term is 15 percent indicating the speed of adjustment in response to deviation from the long run equilibrium is relatively low.