Measuring the Dynamics of Volatility Spillovers between Dollar and Iranian Stock Market: Applying the Frequency Connectedness Approach

Document Type : RESEARCH PAPER

Authors

1 Associate Professor, Department of Economics, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

2 Department of Economics, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

3 Master's graduate, Department of Economics, Faculty of Economics, Allameh Tabataba’i University, Tehran, Iran

Abstract

This research employs a Time-Varying Parameter Vector Autoregressive frequency connectedness approach, utilizing daily data spanning from October 2014 to October 2023, to investigate the dynamic spillovers of return volatility between the dollar and 8 listed industries in Iranian stock market across short-term, medium-term, and long-term frequency intervals. The study reveals several key findings: First, the average total connectedness index, indicative of interconnectedness, was approximately 50%, escalating to over 70% in the preceding three years. Second, volatility spillover primarily manifests at short-term frequencies, highlighting short-term connectedness as a significant source of systemic risk. Third, while the dollar receives shocks throughout the observed period and at short-term frequencies, it emerges as a transmitter of volatility to the market network in medium and long-term frequencies. Fourth, the basic metals industry emerges as the most permanent transmitter of volatility over medium and long intervals. Fifth, strong pairwise connectedness indices are observed among the four major commodity-oriented industries. Sixth, a lead-lag effect is discerned within the stock market network, with large listed industries considered to transmit volatilities to smaller industries

Keywords

Main Subjects

References

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