The Impact of Fluctuations in Unofficial Currency Exchange Rate on Stock Returns in Iran (TVP-VAR Approach)

Document Type : Research Paper

Authors

Department of Economics, Faculty of Social Sciences and Economics, Al-Zahra University , Tehran. Iran.

Abstract

The exchange rate fluctuations have been a central topic in financial economics due to their profound impact on stock market performance. In the context of Iran has been characterized by significant economic and geopolitical events, leading to substantial variations in the unofficial exchange rate. Understanding the relationship between exchange rate fluctuations and stock market returns during this period is crucial for both investors and policymakers. Accordingly, this article analyzes the exchange rate fluctuations on stock market returns dynamics of during the period from March 2012 to September 2023. To achieve this goal, the GARCH family approaches were initially used to extract exchange rate volatility. The results showed that the ARIMA-MSEGARCH model with skewed-T distribution had higher accuracy in extracting exchange rate volatility compared to other approaches. Subsequently, the impact of exchange rate fluctuations in two regimes—high and low volatility—on stock returns over different time intervals was analyzed using the TVP-VAR approach. The findings indicate that, in both regimes, the unofficial exchange rate had a positive effect on stock returns. Moreover, the intensity of the impact varied across different levels of volatility and time periods. Furthermore, based on the nonlinear causality test by Diks and Panchenko, causality from the unofficial exchange rate to stock returns was confirmed, while the reverse causality was not. Consequently, the flow-oriented hypothesis between the unofficial exchange rate and stock returns in Iran cannot be rejected.

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Main Subjects

References

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Journal of Economic Research (Tahghighat- E- Eghtesadi)
Volume 60, Issue 1
June 2025
Pages 887-926

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History

  • Receive Date: 04 November 2024
  • Revise Date: 13 April 2025
  • Accept Date: 10 May 2025

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