hadi keshavarz; Mohammad Rezaei
Abstract
1- INTRODUCTION
One of the important factors that investors consider in their decision is the return and risk of the stock market. During the last three decades, Iran has faced many risks at the macro-level of society. Increasing economic, financial and political risk affects the level of activities ...
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1- INTRODUCTION
One of the important factors that investors consider in their decision is the return and risk of the stock market. During the last three decades, Iran has faced many risks at the macro-level of society. Increasing economic, financial and political risk affects the level of activities and efficiency of markets. A review of studies of the influence of risk on return and risk Tehran Stock Exchange shows that a comprehensive study to investigate the effect of political, economic, and financial risk with capital markets has not been done. Therefore, this study seeks to answer the question of whether political, economic, and financial risks affect stock risk and return? Which risk has the greatest impact on stock market risk and return? This study tries to examine the effect of political, economic, and financial risks on stock risk and return.
2- THEORETICAL FRAMEWORK
Economic risk is a tool for assessing a country's economic strengths and weaknesses. Financial risk is a tool to assess a country's ability to pay its costs. Financial risk is a measure of a country's ability to formally finance, trade, and trade liabilities. Political risk is often defined as the undesirable risk of political events.
Increasing economic and financial risk affects the stock market through different channels: 1. Impact on investors' expectations and consequently change in the current value of investment projects, change in profit flow or change in the value of assets of firms admitted to the stock market 2. Engaging the non-productive sectors and thus changing liquidity flows 3. Changes in international financial flows affect the stock market.
Political risk can also affect the stock market through the following channels: 1. Changing economic outlook and consequently changing the trust and behavior of consumers and investors that change the demand and performance of markets 2. Political and social protests as a result of any change of government 3. Changing political parties and consequently changing policymakers' positions on legislation for working-class or upper-class voters 4. Supporting some industries or geographical areas 5. Change in foreign direct investment 6. Affecting the quality and structure of institutions causes instability in prices and market performance.
Many studies have been done in this field. For example, Heidari et al. (2015) studied macroeconomic variables affecting the volatility of stock returns on the Tehran Stock Exchange in different regimes using a nonlinear approach to change the Markov ARMA GARCH multivariate regime. Their results show that the growth rate of GDP has a significant negative effect on the volatility of stock returns. Inflation, money growth rate and exchange rate volatility have a positive and significant effect on different regimes, but oil price volatility has different effects on stock price volatility.
Zolfaghari and Sahabi (2016) investigated the effect of exchange rate fluctuations on stock return risk based on Markov regime transfers. The results showed that the industry efficiency index follows regime transitions and responds asymmetrically to external shocks. Also, the risk of return on industry indices are significantly affected by exchange rate fluctuations in the short and long term.
The difference between this study and previous studies is that, firstly, none of these studies have examined three types of risks (economic, financial, and political) on the Tehran Stock Exchange simultaneously. Second, most studies have considered the relationship between economic and financial variables and the stock market, and few studies have been conducted on financial and economic risks on the stock market.
3- METHODOLOGY
In this research, financial, political, and economic risk indicators in the framework of structural VAR for the period 2008-2019 have been used seasonally. For stock market risk in the form of conditional variance GARCH model is used. The advantage of the SVAR model, unlike the VAR model, is that it has an economic logic based on economic theories.
4- CONCLUSIONS & SUGGESTIONS
The results of the Impulse response functions show that as the economic risk decreases, the stock return risk decreases. But the political and financial risk index has little effect on stock return risk. In other words, stock market risk is more affected by economic variables and political and financial variables have not been able to have much effect on market risk. Also, reducing financial risk has increased stock returns, but the impact of economic risk is first negative and then positive. The effect of political risk on stock market returns is volatile and negligible. The effect of stock market risk on market returns is positive. The results of analysis of variance also show that the economic risk index had the most explanations in stock market return and risk.
In general, the Tehran Stock Exchange market is more affected by economic variables and financial and political variables have little effect on this market. Therefore, macroeconomic policy-making seems necessary to reduce economic risk.
firouz fallahi; khalil jahangiri
Abstract
Introduction
Intertwined structures of modern economies make losses to spread from a sector or a country to other countries or economic sectors. Empirical evidence has shown that markets are not isolated from each other and their movements are not separated. Particularly in recent decade’s development ...
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Introduction
Intertwined structures of modern economies make losses to spread from a sector or a country to other countries or economic sectors. Empirical evidence has shown that markets are not isolated from each other and their movements are not separated. Particularly in recent decade’s development of agencies and international and multinational organizations, developments in information technology (IT), deregulation of financial systems in industrialized countries and immense growth in international capital flows have caused financial markets in the world to have more connections (Bracker & Koch, 1999). Volatilities in various asset markets are intensely in linkage. Therefore, it is vital for investors to have the knowledge of the linkages between financial assets to take the appropriate decisions.
Since the beginning of the summer of 2011 Iran's economy has been through a very special situation as a result of sanctions, targeted subsidies effects, increasing liquidity for many years and other factors. After a long period of exchange rate management in this country, instability gripped the market and consequently, the gold coin market was also experiencing an increase of volatility. Tehran Stock Exchange index began to break the records since 2012. Due to the economic recession and high inflation, entering stock market, coin market or the foreign exchange market as investing alternatives to investors who had hot money in their hands.
In such a turmoil that has been created in the aforementioned property market, these questions may be asked that; how is the structure of interrelationships of assets such as stocks, gold coin and currency in Iran? Is there any evidence of the occurrence of the phenomenon of financial contagion in currency, gold coin and stock markets in Iran?
Theoretical Framework
Many theoretical explanations are presented about financial contagion in the financial literature. In most studies, financial contagion is considered as highly co-movements which is the result of rational behavior of activists in markets with failure (e.g., asymmetric information, risk-bearing capacity, imperfect competition, wealth and borrowing constraints, etc. ) or as irrational decisions by the same market activists (e.g., herding behavior) (Choe, et al., 2012).
According to Claessens and Forbes (2004), financial contagion causes has been classified into 2 groups as follow:
Methodology
Following the study of Choe, et al. (2012), our model consists of three parts: first, we use the dynamic conditional correlation (DCC) model proposed by Engle (2002) to capture the time-varying nature of the conditional correlation. Then, inspired by very restrictive definition if contagion provided by World Bank (contagion is defined as a statistically significant change in the correlation dynamics during "crisis times" relative to correlations during "tranquil times"), to examine contagion, we specify modified DCC multivariate GARCH model, with a time dummy variable imposed for representing the turmoil periods and performs the likelihood ratio (LR) test. Finally our results from time-varying conditional correlation test are compared with the results of adjusted traditional correlation test.
Results & Discussion
The obtained results of using t-student test for financial contagion hypothesis between markets indicated that the exchange market as the crisis trigger seems to be affected by the gold coin market. Furthermore, the t-student of their adjusted correlation coefficients during the crisis was significant. This result supports a pure contagion hypothesis after the exchange market shock. Also, the likelihood ratio test results indicated that only linkages between two markets (including exchange market and gold coin market) exhibited contagion evidence. The estimated value of was positive and statistically significant at the 5% level, implying that there was a sudden jump in the conditional correlation dynamics between exchange market and gold coin market. Moreover, the results showed that there is no evidence of financial contagion in the relationship between exchange-stock and gold coin-stock markets. The estimated value of was insignificant in the modified DCC model of the exchange-stock and gold coin-stock markets. This implies that there is no significant jump in the conditional correlation dynamics between the exchange market and stock market as well as gold coin market and stock market during the crisis period. This result is consistent with the conventional t-test results.
Conclusion & Suggestions
Following Choe, et al. (2012), we used a time-varying conditional correlation test for financial contagion among exchange, stocks and gold coin markets during the period of 27/03/2010 to 21/09/2013 in Iran. In this time-varying correlation test, contagion is defined as a structural break in the dynamics of conditional correlation during the crisis period. The reason for the selection of this period of time is dramatic fluctuations in the mentioned market (especially in exchange market and gold coin market) whose starting point was 08/2011. Using the dynamic conditional correlation (DCC) model, we found that only the exchange market and gold coin market show evidence of financial contagion.
It is rational that the very high correlation and financial contagion between gold coin and exchange market could actually neutralize the benefits of portfolio diversification. In front, low correlation and lack of financial contagion between stock-exchange markets and stock-gold coin markets nncourages to invest in stock market instead of investing simultaneously in coin and exchange markets in Iran.
Mohammad Ali Aboutorabi; Mohammad ali Falahi
Abstract
According to the relationship between financial development and economic growth, the question is whether the type of financial structure (bank-based or market-based financial system) can affect the economic growth? This paper attempts to find an answer to the above mentioned question by surviving the ...
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According to the relationship between financial development and economic growth, the question is whether the type of financial structure (bank-based or market-based financial system) can affect the economic growth? This paper attempts to find an answer to the above mentioned question by surviving the effect of financial development of banks and stock markets in some MENA countries.
The Principal components analysis is used to derive a multilateral index for financial development. Moreover, using panel data econometrics, the role of banking system and stock market in encouraging economic growth in the studied countries is investigated.
The results indicate that the effect of banking system development on the economic growth in these countries is significantly negative while the effect of stock market development in spite of being positive is not statistically significant. These results are contrary to the observed empirical evidences in developed countries which are due to the specific and different characteristics of financial markets in developing countries. Therefore, in the case of these countries, it seems that the planning for “financial development” is essential before any controversy over the type of “financial structure”.
