This research examines the long run and short run dynamics among oil prices, interest rates and stock prices in Iran over the most recent 15-year period 1999-2014. Using Johansen’s Co integration test we find the existence of long run equilibrium relationship between oil market and capital market in Iran. The short-term dynamics between the two markets are analyzed using Auto regression, VAR causality. We find unidirectional causality from capital market to oil market. The domino impact of up-waves in capital market is positive for oil market and remains statistically significant for few weeks, while being of opposite tendency in foreign interest rate. These results have wider implications for market integration, policy makers and analysts at large. Since these markets are integrated rather than segmented, from the perspective of investments, risk reduction cannot be achieved in the long run by holding assets from these markets in the same portfolio. However, diversification opportunities are not ruled out in the short run.
Keywords: Oil prices, interest rate, market integration, causal relationship, Co integration, Vector auto regression.