Assessment of Relationship Between Stock Prices, Stock Earning and Yields of Government Participation Securities in Iran by the Fed Model

Abstract

Stock exchange of securities is the major important way's optimal allocation and mobilization of capital in country and knowledge of this market and element and communications extant in it is considering one of important factor's capital market developments. The Fed model is a theory of equity valuation used by some security analysts that hypothesizes a relationship between long term treasury notes and the expected return on equities. According to this valuation model, in equilibrium the real yield on the 10-year U.S Treasury bonds should be similar to the S&P500 earnings yield (that is, S&P forward earnings divided by the S&P level). The Fed Model was so named by Ed Yardeni of Prudential Securities based on the fact that some research at the Federal Reserve in the late 1990s. Method used in Fed model for assessment relationship between stock price, income and long term bond yields is on econometrics methodology and based on cointegration framework. Regarded to importance of investment and its obtained yield, present research has dealing to reviewing relationship between stock price, stock earning and government bond yield (participation bond) in long time and by Fed model. In this study we use of stock exchange information and yearly reporting central bank in 6 and 12 yearly separate groups for long term investigating. The acquired results show that there is any cointegration or long term relationship in research variable and in other word yield of participation bond don't play any role in specification of stock price and yield of investment in stock exchange of securities. Note: Due to bonds prohibited in Islam, and have legal ban issuance of this bound in Iran, Islamic Republic of Iran issues a kind of bond that have some differences with bounds that issue in the world now (all differences expresses in whole paper). Issuance this kind of bond and their earning have no religiously problem in Islam.