Instability in Iran's informal Foreign exchange market: structural breaks and jumps or long memory in volatility?

Document Type : Research Paper

Authors

1 Department of Economics, Faculty of Economics, Management and Accounting, University of Yazd, Yazd, Iran

2 Department of Finance and Accounting, Faculty of Economics, Management and Accounting, University of Yazd, Yazd, Iran

3 Department of Accounting, Faculty of Management, University of Tehran, Tehran, Iran

Abstract

It seems that heavy economic sanctions have been the source of the instability of the unofficial foreign exchange market in the last two decades. This instability can be the result of the high resistance of turbulent shocks in the direction of damping towards the long-term average of the exchange rate, which shows the high persistence of the process. Such stability in unofficial foreign exchange market fluctuations can be caused by large changes in long-term variance due to structural breaks or the existence of long memory in exchange rate returns volatility. this paper seeks to provide a perspective of these two modes and their different aspects on the volatility of the unofficial exchange rate. For this purpose, the persistence of unofficial exchange rate volatility in three cases; We examined original data, original data with structural breaks and refined data from mass jumps and with structural break in combination with exponential (GARCH and IGARCH) and hyperbolic (FIGARCH models) autocorrelation functions. The results of this research show that the unofficial foreign exchange market is affected by collective jumps and sudden changes in the variance of returns. Also, based on the information criteria, the model compatible with the data is the FIGARCH(1,d,1) model with the original data and exposed to double structural failures in the variance, which indicates the extreme instability of the unofficial foreign exchange market and the impact of structural failures caused by sanctions mainly It refers to long-term volatility or unconditional volatility. This model clearly shows the unilateral withdrawal of the United States from the JCPOA and the return of unilateral sanctions after 2018. The uncertainty in Iran's unofficial foreign exchange market is more severe than in 2011.
JEL Classification: C63, D02, D44, E44, E52, E58

Keywords

Main Subjects

References

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History

  • Receive Date: 12 April 2023
  • Revise Date: 16 June 2023
  • Accept Date: 20 June 2023

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