Abstract
This study investigates the effect of two external uncertainties of US Economic Policy Uncertainty (EPU) and OPEC oil price uncertainty against domestic monetary policy uncertainty on Iran's stock return volatility. Reaching this goal, GARCH-MIDAS approach is employed that makes it possible using different variables with different frequencies during the period from January 2009 to September 2017. The research uses Iran's stock return with high frequency and other variables with low frequencies. The results of the GARCH-MIDAS model show that the increase in the US EPU, the OPEC's oil price uncertainty and Iran's monetary policy uncertainty increase volatility of Iranian stock returns. US EPU significantly impact on Iran's stock return volatility, which implies that the Iranian stock market has gradually merged into the global economy. However, oil price uncertainty has stronger effect on the stock return volatility than US EPU. In addition, monetary policy uncertainty is the strongest in affecting stock return uncertainty. Iranian policymakers can reduce the volatility of stock return by decreasing domestic monetary policy uncertainty.Keywords: US Economic Policy Uncertainty, Monetary policy, Oil Price, Iran's stock volatility, GARCH-MIDASJEL Classification: G12DOI: https://doi.org/10.32479/ijeep.9176
Highlights
Iran’s stock market has experienced great development in the last decade compared to other markets
The purpose of this study is to examine the impact of external uncertainties of monthly US economic policy of Baker et al (2016) and monthly oil price against quarterly liquidity uncertainty, as indicator of monetary policy uncertainty, on daily Iranian stock return volatility (Iranian Ministry of Economic Affairs and Finance, 2017)
The purpose of this paper is to consider the impact of important external uncertainties of US economic policy as well as OPEC oil price against domestic monetary uncertainty on Iranian stock return volatility
Summary
Iran’s stock market has experienced great development in the last decade compared to other markets. Economic policy uncertainty (EPU) that is determined by newspaper coverage of the repeated events is an important factor that can shift economic activity. It indicates the role of government in creating financial or monetary uncertainty. This research investigates the role of news-based US EPU as well as OPEC oil price uncertainty on Iran’s stock market volatility. It considers OPEC oil price uncertainty because of the relationship between Iran’s stock market and crude oil market in recent
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