The Effect of Interest Rates and Inflation on Stock Returns: A Case Study of Different Industries in the Tehran Stock Exchange

The main objective of this study is to examine the effect of interest rates and inflation on stock returns of different industries in the Tehran Stock Exchange. In recent years, economic fluctuations caused by increasing inflation rates and changes in bank interest rates have caused widespread concerns among investors, financial managers, and economic policymakers. This study employs multiple regression models and vector error correction models (VECM) to examine the short-term and long-term relationships between variables. In addition, GARCH models are used to analyze the stability and volatility of stock returns against inflation and interest rate shocks. The results of the model estimations show that the inflation rate has a significant and mainly negative effect on stock returns in most industries, especially in those with high dependence on imports or foreign raw materials. On the other hand, the interest rate also has a significant negative effect on the returns of capital-intensive and financing-dependent industries. Based on the findings of the VECM model, there is a long-term relationship between inflation and stock returns in some industries, which is consistent with Fisher's theory. This research suggests that economic policymakers should pay special attention to the direct and indirect effects of interest rates and inflation on the capital market. Also, institutional and individual investors should consider the sensitivity of different industries to these variables in their investment strategies.