Abstract
The Iranian financial markets play an essential role in the country's economic development. In 2019 and 2020, ordinary traders were encouraged by the political authorities to invest in state-owned enterprises. Citizens who invested in Tehran Stock Exchange (TSE) indices routinely complain that the volatile market performance has wiped out their capital and savings. In this study, the reliability of intraday transaction data for 341 stocks listed on the TSE was examined. Our critical objective is to identify fraud on the TSE. The authors applied Benford's first and second digit laws to detect irregularities in financial data based on three goodness of fit tests. The authors found overwhelming evidence of the presence of market manipulation on the TSE. We found that 46 percent of the companies listed on the TSE did not adhere to the law of the first digit. A thorough analysis of compliance with the second digit revealed a similar pattern. Given the severe impact of trade restrictions imposed by the 2018 US sanctions and the substantial increase in Iran's public debt burden, the TSE has become a major source for offsetting the government's deficit by conducting IPOs of state-owned companies. Market manipulation in Iran appears to be motivated by the government's urgent need for fresh capital and its waste. It would be a common misconception to trust the TSE's data.
Highlights
Financial markets are a captivating example of complexity in action: a complex, multi-layered system that evolves around decisions made by a multitude of individual traders who ceaselessly try to win in a global game
To explore the Benford's law (BL) agreement of data, six goodness-of-fit tests were conducted in this study: the Kuiper test, chisquare goodness-of-fit test, and mean average deviation (MAD) for the first and second digits of intraday transactions
A similar analysis of the MAD statistics resulted in a subset of 63 assets that did not meet the Benfordness thresholds
Summary
Financial markets are a captivating example of complexity in action: a complex, multi-layered system that evolves around decisions made by a multitude of individual traders who ceaselessly try to win in a global game. It is generally agreed that financial markets facilitate efficient allocation of funds, maturity transformation, risk transfer, fair pricing, and selling of financial instruments. Investors seek to both maximize returns and minimize risks (Markowitz, 1952). When investors buy (demand) and sell (supply) stocks, asset prices are generally set. As securities are claims on future distributions, investors participate in buy-side and sell-side transactions to the extent that they enjoy access to reliable data and are confident in future trades. Trust is the most important prerequisite for participation in trades
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