Co-movement of Middle East Geopolitical Risk, Financial Stress and Stock Market of Iran

Document Type : RESEARCH PAPER

Authors

1 Master's graduate, Department of Economics, Shiraz University, Shiraz, Iran.

2 Associate Professor, Department of Economics, Shiraz University, Shiraz, Iran.

3 Professor, Department of Economics, Shiraz University, Shiraz, Iran

Abstract

In emerging markets such as Iran, which are highly vulnerable to both domestic and external shocks, the identification of assets and sectors capable of hedging against risks is of particular importance for investors, portfolio managers, and policymakers. While numerous studies have explored the relationship between systemic risks and stock market performance, empirical evidence on the simultaneous behavior of domestic financial stress and geopolitical risks across different industry sectors and time horizons remains limited. This gap in the literature motivates the present study. Using monthly data on Middle East geopolitical risk, financial stress in Iran, and selected sectoral indices of the Tehran Stock Exchange over the period 2009–2023, this study investigates the co-movement patterns among these variables. To capture interactions across multiple time scales, the bivariate wavelet coherence model is employed, allowing the identification of short-, medium-, and long-term co-movement dynamics. Furthermore, to ensure the robustness and reliability of the results, partial wavelet coherence and multiple wavelet coherence techniques are applied, enabling a more comprehensive assessment of the interdependencies among variables. The findings indicate notable heterogeneity in risk-hedging patterns across time horizons. Certain sectors exhibit considerable potential to absorb the effects of domestic and external shocks in the short term, but these protective effects tend to diminish over longer periods. Additionally, sectors respond differently to domestic financial stress and geopolitical risks, with each type of risk generating a distinct hedging behavior. These results provide important insights for financial market participants, highlighting the need for time-sensitive strategies for portfolio diversification and risk management. By illustrating the dynamic interactions between macro-financial risks and sectoral returns, this study contributes to a better understanding of risk allocation and mitigation strategies in emerging markets

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References

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