The Relationship between Inflation, Price-Earnings Ratio (P/E) and Price Behavior of Stocks in Tehran Stock Exchange

The current research aimed to study the correlation between inflation, Price-Earnings ratio (P/E) and price behavior of stocks in Tehran Stock Exchange. In other words, the researcher’s aim in this research was answering this main question that is there any significant correlation between the inflation, P/E and price behavior of stocks in Tehran Stock Exchange, or not? From the point of aim this research is an applied research and from the point of data collection and analysis it is a descriptive research. In the current research all of the active companies in Tehran Stock Exchange are chosen as the population, and after the necessary surveys, 38 companies were chosen from the qualified companies. Thus through analyzing this information in Tehran Stock Market, the current research hypotheses were surveyed and tested. The information of time series of 2006 to 2011 was used for testing the current research hypotheses. In order to analyze the achieved data, the statistical methods and Eviews econometric software were used for conducting the survey. The 1st hypothesis test results showed that the price-earnings ratio is a significant explanatory variable for the stock returns in Tehran Stock Exchange, and accordingly the 1st research hypothesis was confirmed. By rejection of 2nd hypothesis we concluded that Consumer Price Index (CPI) and Industry Price Index (IPI) are not significant explanatory variables for the stock returns in Tehran Stock Exchange. Results achieved from the 3rd hypothesis are also indicators of rejecting this hypothesis, and it shows this point that in Tehran Stock Exchange the CPI and IPI do not have negative significant effect on the average stock returns and also on the fluctuations. At the end a few practical research suggestions are provided as well.