Co-Movement Between Oil Price and Iranian Stock Market Returns: Wavelet Analysis Method

Abstract

The aim of this paper is an examination of the co-movement between OPEC oil price and Tehran Exchange Market returns. To analyze the relationship between two variables, applied the wavelet coherence approach and utilized daily data during 2009-2020. According to the wavelet approach, a dynamic causal relationship between oil price and the stock market return provides for the causality between the two variables and the type of causal relationship in the time-frequency analysis. Findings showed there is a positive correlation between oil price and stock market earnings. Comparison of the data in annual time-frequency scale indicated that the oil price and stock market returns are in phase from 2009 to 2011, and observed a positive relationship between them. From late 2011 to mid- 2015, both variables are in phase, and oil prices are the leading factor in the stock market. During the period 2015 to 2021, both variables are in phase, but co-movements of oil price and stock market returns not observed. The non-causal effect of oil price on stock market earnings at some times does not mean that oil prices do not affect the stock market. As mentioned, in most periods, oil price and stock market profits are in phase. Factors such as imposing economic sanctions on Iran such as oil sanctions, fluctuations in the value of the dollar, volatilities in oil prices, changes in global demand for exports and imports from Iran, privatization, increasing the gap between the official and the market exchange rate, financial markets shocks, Middle East price tensions and the financing process affected the relationship between the stock market and oil price.