Is there a long run relationship between stock returns and monetary variables: evidence from an emerging market

Literature that provides empirical evidence about the long-term relationship between stock returns and monetary variables in emerging markets is limited. In those markets, unlike in mature ones, market participants and the availability of information as well as its quality, change rapidly through time. The purpose of this study is to examine the long-term relationship between stock returns and monetary variables in an emerging market through time by using the cointegration technique. The database is set up at daily frequency of variables that are customarily used by the financial media as determinants of stock investments and the cointegration technique enables us to consider changes in long-run steady-state properties of the equilibrium relationship between the non-stationary stock prices and monetary variables. The findings of this study indicate that, overall results should not be used in formulating investment strategies because they can be misleading in the sense that the variables that explain stock prices might change through time. In the case of ISE, as the market became more mature, the influence of monetary expansion and interest rates disappeared and foreign currency prices regained their expected significance.