Risk and Return in the Tehran Stock Exchange

Abstract:     
This paper analyzes market index returns in the Tehran stock exchange (TSE) within the context of three variants of the Capital Asset Pricing Model: the static international; the constant-parameter intertemporal; and a Markov-switching intertemporal CAPM, which allows for time-varying degree of integration with regional and international equity markets. We find that TSE returns are CAPM-efficient at monthly frequency with respect to several international market indices. Moreover, we find evidence in support of international integration of the TSE with respect to international markets. In addition, we conduct an extensive investigation for the direction of causality between TSE returns, international market index returns, and those in neighboring countries.

Number of Pages in PDF File: 44

Keywords: Asymmetry, Conditional correlation, Conditional skewness, Efficiency, Emerging and frontier markets, Granger causality, ICAPM, Markov switching, Volatility

JEL Classification: C22, C32, G12, G15

Accepted Paper Series