Political Uncertainty and Stock Market Fluctuations in Iran: With Consideration of International Political Changes

Document Type : Research Paper

Author

Assistant of Economic, Shiraz Branch, Islamic Azad University, Shiraz, Iran.

10.22103/jdc.2021.15440.1091

Abstract

Objective: Stock markets are one of the most important and popular financial markets in the most countries. The volatility of stock market behavior has always been discussed. Due to the importance of stock markets in the economy of nations, the discussion of determining the factors affecting stock market fluctuations has always been considered. One of the factors influencing the stock market is political uncertainty variable.
Thus, political uncertainties can pave the way for changes in the stock market. In the stock market, large fluctuations cause capital inflows and outflows at all times. The effects of these movements on the economy of countries can be significant. In developing countries, Impulses to the economy due to stock market shocks can be extremely risky. Therefore, the study of the interrelationships between stock market fluctuations and political developments is of particular importance.
 
Methods: First, the Zivot-Andrews test was used to determine the stationarity of variables by considering the possibility of investigating the existence of endogenous structural break. The asymmetric Garch method (GJR-GARCH) has been used to investigate and estimate the relationships between variables. Before estimating the GJR-GARCH model, an appropriate ARMA model must be estimated for each of the variables, so that we can have a good fit of generalized Autoregressive Conditional Heteroscedasticity model. The Schwartz-Bayesian (SBC) criterion was used to obtain the optimal ARMA lag. Also the ARCH test is used to determine the presence of heteroscedasticity.
 
Results: The results of this study show the positive and significant impact of the presidential election on the stock market. Also, in the framework of the asymmetric Garch model, different periods of nuclear negotiations as well as regional political developments show a direct and significant impact on the stock market index; In addition, the results relative to study period show that the control variable of consumer price index will have a significant and positive effect on the stock market index.
 
Conclusion: Based on the research findings, it can be concluded that the Iranian stock market reacts significantly to a variety of domestic political events such as the presidential election and foreign events such as the imposition of economic sanctions and negotiations to resolve them. However, the impact of political cycles on different types of asset market (such as housing, gold, stocks and foreign exchange) and the reciprocal effects of these fluctuations on each other should not be ignored. Therefore, stock market planners and macroeconomic policymakers of the country are advised to use all the support leverages of capital market to maintain and protect this market and safeguard micro and macro capitals, and Prevent capital flight and loss of public trust by intelligently managing the market before occurring major crises.

Keywords

Main Subjects

References

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Journal of Development and Capital
Volume 6, Issue 1 - Serial Number 10
September 2021
Pages 123-145

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History

  • Receive Date: 01 May 2020
  • Revise Date: 01 January 2021
  • Accept Date: 15 May 2021

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