Asymmetric Volatility Spillovers of Oil Price and Exchange Rate on Chemical Stocks: Fresh Results from a VAR-TBEKK-in-Mean Model for Iran

Abstract

Investigating the dynamic relationship between markets has attracted the interest of many researchers; however; assessing the asymmetric volatility spillovers has been addressed by a few studies. In this regard, this study mainly aims to investigate the asymmetric spillovers of oil price return and exchange rate, as the key variables, on chemical industry stock returns in Iran through the lens of a VAR Triangular BEKK in mean (VAR-TBEKK-in-mean) model. Also, daily data from March 31, 2009, to June 28, 2019 was selected. The chemical industry was selected since attracted a high share of capital in the Tehran Stock Exchange (TSE) and highly correlated with crude oil prices. The results indicated a significant volatility spillover from oil and exchange markets to the chemical industry stocks. Moreover, the result of the symmetry test indicated that global oil price shocks asymmetrically affect the conditional volatility of chemical industry stock returns. The results additionally indicate that the relationship between these markets and the extent of risk spillover between them is severely affected by the (good and bad) news and volatility of another market (particularly the oil market). Based on the results, investors are better off allocating their portfolio in the chemical stocks more carefully, especially when the volatilities in the two markets (exchange and crude oil) are high. Capital market officials are advised to develop the stock market by deepening the capital market and taking into account the risk spillovers of foreign exchange and oil markets to the stock market.