The effect of volatility spillover risk of asymmetry between uncertainty of the foreign exchange market and the Tehran Stock Exchange

Subject Areas : Financial Economics

abbas naeimi ¹ , Mirfeiz Fallahshams ² , فریدون اوحدی ³

1 - Department of Finance Management, KA.C., Islamic Azad University, Karaj, Iran.
2 - financial management.management.iran.tehran
3 - استادیار گروه حسابداری، دانشگاه آزاد اسلامی، واحد کرج، البرز، ایران

Received: 2025-05-10 Accepted : 2025-05-24 Published : 2025-07-02

Keywords: Spillover, Asymmetric Risk, Currency Market, GARCH Model, Structural Shocks,

Abstract :

Objective: The main objective of this study is to examine the structure of volatility and its spillover between the Iranian stock market and the foreign exchange market using advanced GARCH models and regime-switching frameworks. The focus is on analysing the dynamics of volatility and identifying the direction and intensity of shock spillovers between these two markets over different time periods.

Methodology: To model the conditional volatility of stock and currency returns, the MS-EGARCH model was employed. For analysing volatility spillovers, multivariate GARCH models including BEKK-GARCH and VEC-GARCH were estimated. Additionally, generalized variance decomposition within a VAR(6) framework was used to identify the sources and magnitude of forecast error variances attributed to shocks in each market.

Findings: The results indicate that the stock market volatility follows a two-regime structure, with the first regime representing relative stability and the second regime corresponding to periods of instability. The currency market volatility was modelled under a single regime, exhibiting persistent and intense fluctuations. Findings from multivariate GARCH models confirm the existence of bidirectional volatility spillovers between the stock and foreign exchange markets. Furthermore, the total and net spillover indices surged significantly in certain periods, particularly in the years 2011, 2018, 2020, and 2021.

Conclusion: The interaction of volatility between the stock and currency markets demonstrates a dynamic and time-varying pattern, which may lead to systemic instability in financial markets. The findings emphasize the need for coordinated monetary and fiscal policies to mitigate adverse inter-market spillover effects.

References:


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