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The Mediating Role of Risk in Transmitting Currency and Oil Shocks to the Iranian Stock Market
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Amin Asgharian *    , Seyed kamal Sadeghi |
| Economic Development, Faculty of Economics and Management, Tabriz University |
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Abstract: (20 Views) |
| Volatility in crude oil prices and exchange rates acts as a key exogenous shock determining financial stability in oil-dependent countries. Existing literature often ignores the transmission mechanism and the separation of effects from risk. This study aims to investigate the transmission mechanism of global oil and exchange rate shocks to the Tehran Stock Exchange, emphasizing the mediating role of market risk and the predictability of market direction. Using daily data from 2012 to 2026, log conditional variance series were extracted from daily returns using the Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model. Afterwards, Structural Equation Modeling (SEM) was employed to disentangle the transmission channels, and a Probit regression model was used to examine the probability of positive market returns. The results reveal that both oil and exchange rate volatilities have a positive and significant effect on market risk. SEM findings confirm a partial mediation effect for oil volatility and a full mediation effect for exchange rate volatility, indicating that oil shocks affect stock returns through both direct channels related to income fundamentals and indirect channels associated with increased risk and uncertainty, whereas exchange rate shocks affect returns primarily through the indirect channel. Furthermore, the findings of the Probit model provide no strong evidence to either confirm or reject the risk-return tradeoff theory within the examined framework, suggesting that the explanatory power of the selected variables for the probability of positive market returns is limited. Overall, the findings suggest that the Iranian capital market's reaction transcends mere psychological panic; it represents a combination of rational responses to fundamental signals and rapid adjustments to inflationary expectations, rather than an efficient pricing of short-term risks. |
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| Keywords: Oil price volatility, Exchange rate volatility, Structural Equation Modeling (SEM), Risk and return tradeoff theory, Probit model |
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Full-Text [PDF 1427 kb]
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Type of Study: Research |
Subject:
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