Dynamic spillover between foreign exchange and stock markets in the business cycles of Iranian economy

Subject Areas : Financial Economics

Mehdi Mozafarnia ¹ , Mir Faiz Fallah Shams Lialestani ² , Gholamreza Zamardian 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: 2023-04-01 Accepted : 2023-06-08 Published : 2023-06-22

Keywords: F31, business cycles, C1, Keywords: Dynamic spillover, contagion JEL Classification: G12,

Abstract :

Abstract The increasing integration of financial markets and recent financial crises has created a new wave of researchers' attention to the issue of spillover and contagion in financial markets, to be able to better choose risk hedging instruments whit predicting market trends. Policymakers and market participants are also increasingly paying attention to the spillover effects and how they behave during different periods of economic boom and busts. Therefore, the present study aims to estimate the spillover effects between foreign exchange and stock markets in the Iranian economy and seeks to study how the spillover between these two markets behaves in the business cycles of the Iranian economy. For this purpose, by studying the daily data of 1389-1399 in which the Iranian economy is facing two periods of economic boom and two periods of economic recession, the daily spillover of foreign exchange and stock markets has been estimated and analyzed based on dynamic spillover econometric approach of Diebold and Yilmaz (2012). According to the results, in general, the spillover effect between two markets exists, but the spillover rate from the foreign exchange market to the stock market is higher than the spillover from the stock market to the foreign exchange market. Also, the spillover and, of course, the dependence of the two markets during the recession was time-varying and is more severe than during the boom. These results have important implications for policymakers and market participants and show that it is necessary to consider the relationship between the foreign exchange market and stock market according to the state of the business cycle of the economy in investment policies and decisions. Also, it is not optimal to adopt a fixed and predetermined approach, both for macro policies and for investment strategies, in these markets.

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