Time-varying volatility spillover between exchange rate and Tehran stock market; new evidence from the Corona pandemic مقاله

چکیده:

This study employs the Diebold-Yilmaz spillover index within the framework of a time-varying parameter vector autoregressive model (TVP-VAR) to analyze the dynamic connectedness between exchange rates and the Iranian stock market amidst the COVID-19 pandemic. Utilizing daily data spanning from October 2014 to October 2023, we examine the volatility spillovers between the US dollar and the stock indices of eight industries, including "chemicals", "basic metals", "petroleum products", "extraction of metal ores", "agriculture", "sugar", "cement", and "ceramics". Our findings reveal that systemic risk, represented by total connectedness within the network, averaged approximately 50% before the onset of the COVID-19 pandemic. However, following the emergence of the pandemic, network connections intensified significantly, surpassing 70% at times. The US dollar variable exhibits the highest idiosyncratic risk (75.62%), while the indices of basic metal industries (34.52%) and metal ores (34.59%) demonstrate the lowest idiosyncratic risk. Analysis of the network dynamics indicates that volatility originating from export-oriented commodity industries, particularly basic metals, predominantly influences the US dollar variable, acting as a net transmitter of volatilities to smaller industries, notably ceramics. Moreover, the basic metal industry emerges as the primary transmitter of volatilities within the network, with the agricultural and ceramic industries identified as significant recipients of shocks. Introduction Financial asset markets are subject to volatility at one point or another due to domestic or global political, economic, and social events. It is clear that major events such as the COVID-19 pandemic can significantly alter the relationships between markets. In such circumstances, studying the dynamics of correlations and information flows between different assets and markets becomes important and provides investors, policymakers, and portfolio managers with deeper insights. In these circumstances, the two foreign exchange and stock markets react strongly to events and affect the economy. Therefore, this article aims to answer the following questions: How do the dynamics of dollar rate volatility affect the returns of various stock market industry indices, and how do the dynamics of stock market industry index return volatility affect the dollar? How does the connectedness between the dollar rate and stock market industry indices change in the period before and after the COVID-19 outbreak? Method The present study uses a TVP-VAR approach. The method overcomes certain shortcomings of the connectedness criteria of standard VAR models, such as “the arbitrarily chosen rolling window size”, “missing observations”, and “parameters sensitive to outliers”. Results An examination of the dynamic spillovers of return volatilities between the exchange rate and the stock index of 8 listed industries, including "chemicals", "basic metals", "petroleum products", "metal ore", "agriculture", "sugar", "cement" and "ceramics" during the period from October 2014 to October 2023, shows: The total connectedness index is around 53 percent, which indicates a relatively high systemic risk in the network. The dynamics of the total directional net connectedness index indicate that each variable has been a net transmitter of shocks in some periods and a net receiver of shocks in others. However, in the overall period review, the basic metals, cement, chemical, metal ore, and petroleum products industries act as transmitters of shocks, and the agricultural, ceramic and sugar industries and dollar act as receivers of shocks in the network. The dynamics of the total connectedness index during the period of study indicate a significant increase in this index after the COVID-19 pandemic, with the highest figure for the index also being experienced after the outbreak of this disease. In the network, the basic metals industry is identified as the strongest transmitter of shocks, and the agricultural and ceramic industries are also the most important shock receivers. In addition, on average, the dollar is affected by the shocks of export-oriented commodity industries, especially basic metals, and has been a net transmitter of shocks to small-stock industries, especially ceramics. Table 1. Averaged dynamic connectedness USD chemicals petroleum products basic metals metal ore agriculture sugar cement ceramics FROM USD 75.62 4.38 3.40 4.50 3.31 1.80 1.34 4.03 1.61 24.38 chemicals 3.89 36.35 10.54 15.82 15.01 4.02 3.02 7.39 3.94 63.65 petroleum products 1.89 11.93 44.49 15.07 11.01 2.20 3.23 5.94 4.24 55.51 basic metals 2.85 14.06 12.19 34.52 19.71 3.01 3.23 6.90 3.52 65.48 metal ore 2.91 14.12 10.06 22.63 34.59 3.23 3.37 6.06 3.03 65.41 agriculture 2.62 6.01 4.76 4.30 5.17 56.28 6.80 9.09 4.98 43.72 sugar 1.92 6.44 4.55 4.68 4.08 6.11 51.87 11.49 8.86 48.13 cement 2.13 6.61 6.55 8.94 6.31 6.83 8.70 42.19 11.73 57.81 ceramics 2.66 5.17 4.55 5.64 4.75 4.98 9.36 15.58 47.32 52.68 TO 20.87 68.73 56.61 81.58 69.35 32.17 39.06 66.48 41.92 476.77 NET -3.51 5.08 1.10 16.10 3.94 -11.55 -9.07 8.67 -10.76 52.97 NPDC 3 5 5 8 7 0 2 5 1 Figure 1. Dynamics of Total Connectedness Index Figure 1. Net pairwise directional connectedness Conclusion This research provides valuable insights for policymakers in formulating growth-stimulating policies and designing preventive measures against systemic risk. Additionally, it offers investors an efficient tool for constructing optimal investment portfolios tailored to systemic risk considerations. Acknowledgments We would like to thank the esteemed editorial board for their efforts in improving this article.