Regime Dependent Effects and Cyclical Volatility Spillover of Exchange Rate and Stock Prices in Iran

Subject Areas : Financial Econometrics and Quantitative Methods

Mahdi Mozafarnia ¹ , MirFeyz Fallahshams ^{2 *} , Gholamreza Zomorodian ³

1 - Department of Financial Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran
2 - Department of Financial Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran
3 - Department of Financial Management, Central Tehran Branch, Islamic Azad University, Tehran, Iran

Received: 2021-05-06 Accepted : 2021-12-12 Published : 2021-11-22

Keywords: Stock Returns, exchange rate, regime dependence, cyclical volatility spillover, economic recession,

Abstract :

The main purpose of this study is to investigate the regime dependence and the cyclic contagion of exchange rate and stock prices volatility with emphasis on the economic boom and busts. For this purpose, first, using the Markov switching-EGARCH method, the time series of conditional volatility of exchange rate and stock market returns were estimated and extracted, contagion, spillover between markets and their regime dependence in the boom and bust in 2010 - 2020 has been analyzed and studied. The results show that: 1. Estimation of conditional volatility by Markov switching-EGARCH method is more efficient than traditional GARCH methods. 2. The volatility dependence between stock markets and foreign exchange is more severe during periods of recession than during periods of boom. 3. The rate of volatility spillover from the foreign exchange market to the stock market is greater than the rate of spillover of volatility from stocks to foreign exchange. 4. The spillover of volatility from the foreign exchange market to the stock market in the regime of booms and recession is not significantly different. 5. In a regime of economic booms, the rate of volatility spillover from the stock market to the foreign exchange market is greater than that occurs in a regime of recession. Therefore, the volatility of exchange rate and stock prices in Iran are dependent on the regime of the economy, and also the spillover between them in these two regimes is different.

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