Financial Economics
Majid Aghaei; Amin Razinataj
Abstract
Given the interconnected nature of financial markets, understanding the relationships among them is essential for investors and traders in selecting optimal portfolios, and for policymakers in adopting appropriate monetary and financial policies. The present study aimed to investigate the interrelationship ...
Read More
Given the interconnected nature of financial markets, understanding the relationships among them is essential for investors and traders in selecting optimal portfolios, and for policymakers in adopting appropriate monetary and financial policies. The present study aimed to investigate the interrelationship between risk and return, as well as their spillover effects, between Iran’s stock market and competing markets-namely the foreign exchange, gold, and housing markets-under varying bullish and bearish market conditions. The analysis relied on monthly data from 2011 to 2022, as well as a multivariate GARCH model. The results showed significant spillover effects of returns and volatility from the foreign exchange market to the stock market during both bullish and bearish phases of the foreign exchange market. In addition, return spillovers from the stock market to the foreign exchange market were also observed across both market conditions, underscoring the strong interdependence between these two markets in Iran. However, the study found no evidence of return spillovers from the stock market to the gold market under either market condition. In contrast, return and volatility spillovers from the gold market to the stock market were confirmed in both bullish and bearish phases of the gold market. The results did not confirm the return and volatility spillover effects from the housing market to the stock market under either bearish or bullish conditions in the housing market. However, a return spillover from the housing market to the stock market was observed during bearish conditions in the stock market. This suggests that investors in Iran’s housing and stock markets likely belong to two distinct spectrums.IntroductionThe existence of strong and efficient financial markets, supported by appropriate and active organizations, plays a critical role in promoting investment, economic growth, and development. In recent years, the analysis of inter-market relationships has gained significant attention from capital market practitioners and researchers. Empirically modeling and examining these relationships is essential for investors seeking to implement effective investment and hedging strategies, particularly for portfolio diversification. According to financial theories and prior research, when two markets are weakly correlated, external shocks in one market have less impact on the other. As a result, investors can reduce their risk by diversifying their portfolios across such markets (Kundu & Sarkar, 2016). Asset prices in financial markets are inherently volatile, influenced by relevant market developments as well as sudden, unexpected changes triggered by domestic and global economic, social, and political events (Kang et al., 2011). This volatility often prompts investors to adjust the composition of their asset portfolios (Attarzadeh et al., 2022). This phenomenon is referred to as volatility spillover (Pandey & Vipul, 2018), which can both exacerbate the turmoil in the crisis-stricken market, and transmit volatilities and shocks to other markets (Khalifa et al., 2014). Consequently, the magnitude of price volatility in a given market is influenced not only by its own historical fluctuations but also by the volatility of other markets (Zhang et al., 2008). This issue has gained increasing importance in today’s economies, where advanced communication systems and the interdependence of financial markets have shaped the nature of markets.Understanding the mechanisms of interdependence and volatility and return spillovers among assets is crucial for several reasons, such as assessing market efficiency, optimizing asset portfolios, managing risk, and regulating the market. In other words, accurate identification of the behavior of asset returns and price volatility-along with their interrelationships-is essential for optimal resource allocation, accurate pricing of financial assets, optimal selection of asset portfolios, and better forecasts of future price movements (Hassan & Malik, 2007; Poon & Granger, 2003). Furthermore, as shown by Fabozzi and Francis (1978), the beta coefficient in the Capital Asset Pricing Model (CAPM) can vary across different market conditions, such as during bullish versus bearish markets or periods of high versus low volatility. A review of developments in Iran’s stock, foreign exchange, gold, and housing markets reveals significant and sudden changes in asset prices and heightened volatility, especially in recent years. Due to the economic stagnation and high inflation, many investors in the Iranian economy have turned to the stock, foreign exchange, and gold markets as alternative investment options. Understanding the spillover of volatility and returns across these markets-under varying market conditions-is essential for assessing market efficiency, selecting asset portfolios, and determining asset pricing. Accurately identifying and analyzing the behavior of price volatility and returns enables policymakers to adopt appropriate regulatory policies. This study aimed to examine the interrelationships of risk and return, as well as their spillovers between the stock market and other competing markets (foreign exchange, housing, and gold) under different market conditions, specifically bullish and bearish phases. This focus on varying market conditions ensures the novelty of the present study in terms of its approach.Materials and MethodsThe current study employed a bivariate generalized autoregressive conditional heteroskedasticity (GARCH) model to investigate the mutual relationship between the return and risk of Iran’s stock market and its competing markets. The multivariate GARCH model is designed to model the simultaneous volatility of two or more variables. The model examines the relationship between the volatilities of two series of variables, in which the conditional variance is modeled as a function of its own lagged value and the lagged value of its error residuals (Suri, 2013). To analyze the spillover effects of volatility and returns across different markets, the study used the VAR-BEKK-GARCH model. First, the vector autoregression (VAR) method was used to estimate the research model. Then, the system of mean and variance equations was constructed and estimated using the VAR(1)-BEKK(1,1) method. Moreover, the Hannan-Quinn, Schwarz-Bayesian, and Akaike selection criteria were used to select the optimal model intervals. Based on these criteria, the VAR(1)-BEKK(1,1) model was selected to estimate all the models. The equations in the VAR-BEKK-GARCH model were divided into two main categories: the mean equation and the variance equation. The mean equation estimated the spillover effects or the contagion rate of market returns, while the variance equation estimated the spillover or contagion rate of volatility and shocks among the variables.Results and DiscussionAccording to the results, during bullish and bearish conditions in the stock and foreign exchange markets, there is a noticeable spillover effect in both returns and volatility between these two markets. This indicates a strong interdependence between the foreign exchange and stock markets. The findings also showed that under normal market conditions, there is no significant spillover of returns or volatility between these markets. However, during periods of bullish or bearish markets, spillover effects become evident. Regarding the relationship between the stock market and the gold market, the study found no significant spillover of returns from the stock market to the gold market under either bullish or bearish stock market conditions. In contrast, during both bullish and bearish conditions in the gold market, there is a clear spillover effect of returns and volatility from the gold market to the stock market. This finding seems logical, given the high correlation between the gold market and the foreign exchange market in Iran. A positive or negative shock in the foreign exchange market is likely to be transmitted to the gold market, causing return and volatility spillover effects between the gold market and the stock market. In the case of the housing market, the study found no evidence of return or volatility spillovers from the housing market to the stock market, under either bullish or bearish housing market conditions. This could be attributed to the differences in the investor base between the two markets in Iran. Considering the records of high housing returns in Iran, housing market investors tend to be long-term participants who are less responsive to short-term volatility. Furthermore, the lower liquidity of the housing market may contribute to the lack of return spillovers to the stock market, especially during bearish housing market conditions. The results also confirmed a spillover effect of returns from the stock market to the housing market during bearish stock market conditions. This suggests that during downturns in the stock market, investors may shift their capital toward investment in the housing sector, which historically has offered high long-term returns in Iran.ConclusionToday, the significance of the gold, foreign exchange, housing, and stock markets is widely recognized due to their vital role in attracting capital and driving the economic growth and development of countries. Ensuring the proper functioning and coordination of these markets-by strengthening their interconnections and improving their resilience and flexibility-can not only enhance capital attraction and allocation but also serve as a defensive shield against economic shocks. This, in turn, helps mitigate the impact of spillover risks and increases the overall resilience of the economy to shocks. Given the importance for market practitioners and policymakers to understand the relationships among key markets of interest to investors in the Iranian economy, the current study investigated the spillover effects of returns and volatilities between the stock market and its major competing financial markets in Iran-namely the foreign exchange, gold, and housing markets. The analysis focused on both bullish and bearish market conditions, using the VAR-BEKK-GARCH model and monthly data from the period 2011 to 2022. The results indicated a significant interdependence and spillover effect of returns and volatilities between the foreign exchange and stock markets under both bullish and bearish conditions. However, this relationship was not evident under normal market conditions. In the gold market, spillover effects of returns and volatilities toward the stock market were observed only during bullish and bearish phases, but the reverse was not confirmed. As for the housing market, no significant spillover from this market to the stock market was detected, which may be attributed to differences in the investor base across the two markets. Nonetheless, during bearish phases in the stock market, a portion of capital flows into the housing market, reflecting investors’ preference for real estate during stock market downturns. In light of the findings, it is recommended that policymakers work to strengthen economic stability and manage foreign exchange market volatility in order to limit the transmission of shocks across markets. In addition, maintaining investor confidence in the stock market through appropriate incentives is crucial. Special attention should also be given to the correlation between the foreign exchange and gold markets, improvement in the liquidity in the housing market, and development of market forecasting systems.
Financial Economics
Mostafa Abdollahzadeh; Hashem Zare
Abstract
The main purpose of this paper is to calculate the entropy of money in the space of Gross domestic product with the approach of econophysics and investigating the effect of stock market development on it. In this regard, by using annual data in the period of 1370-1398 in the framework of Smooth Transition ...
Read More
The main purpose of this paper is to calculate the entropy of money in the space of Gross domestic product with the approach of econophysics and investigating the effect of stock market development on it. In this regard, by using annual data in the period of 1370-1398 in the framework of Smooth Transition Autoregressive Model (STAR), the asymmetric behavior of monetary irregularities around a threshold at different levels of stock market value as a variable of analysis is investigated. The results show that at low levels of current value of the stock market (the first regime), net capital inventory and budget deficit of governments have positive effects and the number of companies admitted to the stock exchange organization have a negative effect on monetary entropy. At high levels of current value of the stock market (Second Regime), net capital inventory has negative effect and government budget deficit continued to have a positive effect on monetary entropy. Based on the results of this study, it is clear that the dynamics of the stock market will reduce monetary entropy, which is itself an indicator of wasting and lacking of access to the resources.
Financial Economics
Hamid Reza Arbab; Hamid Amadeh; Amin Amini
Abstract
This study investigated the factors that leads to economic uncertainty which may influence the petrochemical companies returns in various market conditions regarding their various levels of capital. To meet this object, we used quarterly data on government’s current expenditures, general government ...
Read More
This study investigated the factors that leads to economic uncertainty which may influence the petrochemical companies returns in various market conditions regarding their various levels of capital. To meet this object, we used quarterly data on government’s current expenditures, general government revenues, liquidity, GDP, and exchange rate, as the political variables for the years 1384-1397. Considering the type of available time series, we exercised the ARIMA-GARCH model to create an indicator to show the uncertainty of economic policies. We used the result to estimate the quantile regression model, along with other factors affecting corporate returns, including the price of the OPEC oil basket and the real rate of returns and market exchange rate. The results of this study indicated that in the bearish market, the greatest negative effect of each economic policy uncertainty is on the companies with lesser capital. Moreover, the intensity of this effect decreases as the market tends to change from bearish to bullish, and finally the economic policy uncertainty will have the least impact on companies with bigger capital.
Macroeconomics
Abdorasoul Sadeghi; Hossein Marzban; Ali Hossein Samadi; Karim Azarbaiejani
Abstract
The unstable state of macroeconomic indicators such as gross domestic product (GDP), investment, and inflation rate, as well as the disproportionate level of high volume of cash held by private individuals versus the low volume of liquidity in manufacturing firms, have always been a significant problem ...
Read More
The unstable state of macroeconomic indicators such as gross domestic product (GDP), investment, and inflation rate, as well as the disproportionate level of high volume of cash held by private individuals versus the low volume of liquidity in manufacturing firms, have always been a significant problem in Iran's economy. In this respect, the relationship among the stock market, bank deposits, and speculation in the foreign exchange market, and also, the central bank's role in directing liquidity between them to affect the macroeconomic indicators are important. The current study evaluates this subject for 1988–2018 using a system of simultaneous equations and the three-stage least squares (3SLS) method. The findings indicate that there has been a significant negative relationship among the stock market, bank deposits, and foreign exchange speculation. The stock market and bank deposits have had a significant positive effect on investment and GDP, and in contrast, foreign exchange speculation has shown a significant negative impact. Conversely, bank deposits have negatively impacted the consumer price index (CPI), whereas foreign exchange speculation has shown a substantial direct effect. Finally, despite the existence of a significant negative relationship between three financial markets in the Iranian economy confirmed by the obtained results, the central bank has forfeited a considerable portion of its potential effectiveness in directing liquidity between parallel financial markets to affect nominal and real economic indicators due to interest rate repression.
Macroeconomics
Mohammad Ali Aboutorabi; Mehdi Hajamini; Sahar Tohidi
Abstract
In recent decades, the effect of financial development on real sector growth has been discussed from different aspects. This paper focuses on financial structure and explains the role of bank-based and market-based financial structures on economic growth by classifying the literature. Using the FMOLS ...
Read More
In recent decades, the effect of financial development on real sector growth has been discussed from different aspects. This paper focuses on financial structure and explains the role of bank-based and market-based financial structures on economic growth by classifying the literature. Using the FMOLS method for the period 1979-2016, the effects of financial structure and banking structure on per capita GDP and sectors’ growth (agriculture, industry, and services) in Iran are estimated. Empirical findings indicate that discriminating policies and bias in financial structure in favor of a specific sector has a negative effect on real sector growth, especially agriculture and industry. Therefore, in support of the design of a balanced financial structure, it is recommended that the state should avoid any intervention or discrimination in favor of a specific sector. In the case of banking structure, the findings show that increasing the financial strength of banks encourages economic growth.
behnaz nanavay sabegh; ali fegheh majidi; ahmad mohammadi
Abstract
The stock market is one of the most important infrastructures for economic development in developing and developed countries. The convergence of stock market returns reflects the interdependence of the economies of countries and the mobility of capital among them. This study aims to test the stock market ...
Read More
The stock market is one of the most important infrastructures for economic development in developing and developed countries. The convergence of stock market returns reflects the interdependence of the economies of countries and the mobility of capital among them. This study aims to test the stock market price index convergence between OECD countries Philips and sul (2007) methodology over the period January 2007-Februrary 2017. The results show that the stock markets do not form a convergent cluster. However, there are three convergent clubs with one divergent market, Luxemburg. Also, the result of convergence test among clusters represents that the first and second clusters form a convergent cluster.
Javad Harati; Gholamreza Zamanian; Hojat Tagizadeh
Abstract
Energy, one of the most essential and important factors of production and the final product, has an important role in the growth and economic development. This research examines the dynamic relationship between financial development and energy consumption based on GMM estimation in 53 developing countries ...
Read More
Energy, one of the most essential and important factors of production and the final product, has an important role in the growth and economic development. This research examines the dynamic relationship between financial development and energy consumption based on GMM estimation in 53 developing countries and 47 advanced countries over the period 2000-2014. The results showed the positive impact of direct foreign investment and national income on energy consumption in the two groups of countries. Energy prices had a completely opposite effect on energy consumption in developing and advanced countries. The results also indicated that in both developed and advanced countries the money market plays a more effective role in reducing energy consumption in comparison with the capital markets. While the effect of financial development through the money market on energy consumption is U- inverse shape in both groups of countries, this effect through the capital market is U-shape and U-shape inverse for developing countries and advanced countries, respectively. These results might have important policy implications for energy management policymakers and authorities to achieve sustainable development in different countries.
Gholamreza Keshavarz Haddad; Mohammad Rezaei
Volume 15, Issue 45 , February 2011, , Pages 103-137
Abstract
this paper following Lakonishok (1992) and Sias (2004), we examine the presence of herding behavior among active institutional investors, test the presence of momentum strategy (as a determiner of herding behavior) and the correlation between herding behavior and weekly, monthly and quarterly stock return, ...
Read More
this paper following Lakonishok (1992) and Sias (2004), we examine the presence of herding behavior among active institutional investors, test the presence of momentum strategy (as a determiner of herding behavior) and the correlation between herding behavior and weekly, monthly and quarterly stock return, using time series data (2006 – 2008) in the Tehran Stock Exchange. Our findings confirm the presence of herding behavior among the institutional investors and show that its intensity is higher than the developed countries, but they reject the presence of momentum strategy and its role as a determiner of herding behavior. Furthermore, the results show that the herding behavior of institutional investors does not affect the market return and has no correlation with the past and future returns.
Mohsen Mehrara; Ghahreman Abdoli
Volume 8, Issue 26 , April 2006, , Pages 25-40
Abstract
This paper uses daily data from the Tehran Stock Market (TSM) to illustrate the nature of stock market volatility in an undeveloped stock market. Although most studies suggest that a negative shock to stock prices will generate more volatility than a positive shock of equal magnitude there is no evidence ...
Read More
This paper uses daily data from the Tehran Stock Market (TSM) to illustrate the nature of stock market volatility in an undeveloped stock market. Although most studies suggest that a negative shock to stock prices will generate more volatility than a positive shock of equal magnitude there is no evidence of symmetric effect in TSM. The EGARCH model passes all the tests and appears to be the most adequate characterization of the underlying data generating process.
