This paper examines the impact of 2005 presidential election of Iran on the Tehran stock exchange volatility as a political shock. It uses GARCH family (FIEGARCH, EGARCH, and GARCH) and Markov Regime Switching (MRS) models as the analytical frameworks for the main the stock daily prices index. Our findings confirm statistical validity of ARIMA – FIEGARCH-X and AR(1) MRS as appropriate specifications. Furthermore, uncertainty in the market caused more volatility before the election and this volatility has continued after the election. Consequently, if the right party wins the election, the market volatility increases and it is actually what investors expect. In addition, MRS reveals that probability of staying in a high volatile situation on average is 0. 71 and the volatility duration in the market is 4 days.
JEL Classification: G14, P16