Document Type : Research Paper

Authors

• Reza Taleblou ¹
• Parisa Mohajeri ¹
• Abbas Shakeri ²
• teymoor mohammadi ³
• zahra zabihi ⁴

¹ Associate Professor of Economics, Allameh Tabataba'i University

² Department of Theoretical Economics,Faculty of Economics , Allameh Tabataba'i University

³ Professor of Economics, allameh tabataba'i university

⁴ Ph.D. Student of Economics, Allameh Tabataba'i University

Abstract

Achieving the correct insight into the structure of connectedness and the spillover of volatilities between different stock exchange industries plays an important role in risk management and forming an optimal stock portfolio. Also, the analysis of inter-sectoral connectedness helps policy makers in designing policies that stimulate economic growth and implementing preventive measures to curb the propagation of systemic risk. In this regard, this article tries to use the data of 3370 trading days during the period of 1388/07/01 to 1402/06/31, encompassing 20 stock market industries (which constitute more than 80% of the Iranian stock market) and applying the connectedness approach based on the vector autoregression model with time-varying parameters (TVP-VAR), to estimate the systemic risk and volatility connectedness of the stock market network. In addition, we implement the minimum connectedness approach in the optimal stock portfolio and compared its performance with two other conventional approaches. The findings reveal that, first; the systemic risk in Iranian stock market is significant and has reached unprecedented figures of 80% in the last three years. Second, the four major export industries (petrochemicals, metals, mining and refining) experience the strongest pairwise connectedness, and among them, base metals appear as one of the most important transmitters of volatilities to the entire stock network. Thirdly, the stock portfolio based on the minimum connectedness method, compared to the minimum variance and minimum correlation methods, shows a better performance based on the criteria of cumulative return and hedge ratio efficiency.

Keywords

• systemic risk
• optimal stock portfolio
• volatility spillover
• minimal connections
• vector autoregression with time-varying parameters (TVP-VAR)

Main Subjects

• Financial Economics