Examining the overflow of financial stress index fluctuations on inflation, interest rate, liquidity and industry index using GARCH-BEKK and VAR models and Granger causality

Subject Areas : Financial engineering

Rohollah Rezazadeh ¹ , Mirfeiz Falah ²

1 - Department of Financial Management, Science and Research Branch, Islamic Azad University, Tehran, Iran.
2 - Department of Business Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran.

Received: 2018-12-18 Accepted : 2019-05-01 Published : 2020-03-20

Keywords: GARCH Model, VAR model, BEKK, Granger causality, Financial Stress Index, Overflow of fluctuations,

Abstract :

During financial stress, the impact of financial stress shocks on economic activity may differ from what is usually observed at normal times. Therefore, it is appropriate to consider the effects of financial stress on economic activity and inflation during the period of financial instability. In this paper, hence, the effect of the deterioration of financial conditions of the Iranian economy on macroeconomic variables between 2012  and 2017 has been investigated. For this purpose, in this research, we intend to study the impact of the fluctuations of the financial stress index on inflation, interest rates, liquidity, and industry index by developing the financial stress index using representatives from different markets. Therefore, using the GARCH two-variable BEKK model and also the VAR model, the effects of shocks and fluctuations between them were tested and then the relationship between them was investigated by Granger's causality test. The results indicate that there is a two-way relationship between the financial stress index and inflation, interest rate, and liquidity, but in examining the causality between the financial stress index and the industry index, the results of the causality test indicate that the industry index itself, in the long run, triggers changes in the financial stress index, but the financial stress index has no effect on the industry index.

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14) Galvao, A., & Owyang, M. (2018). Financial Stress Regimes and the Macroeconomy, Journal of Money, Credit and Banking, Vol50, Issue7, PP 1479-1505
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