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The relationship between oil prices and stock indices in Iran using VARX-DCC-GARCH

Given the important impact of oil price changes on Iran’s oil revenues as an oil exporting country and its effects on the oil economy, especially in the stock market, the effect of oil price changes was investigated using the VARX-DCC-GARCH model. As advantages of this model, it allows investigating the effect of volatility of variables from average and variance (volatility) in a model. It also considers the oil price as an exogenous variable affecting short-term, long-term and time-variable relationships. Furthermore, VARX-DCC-GARCH considers correlations between volatility of variables. Monthly data of the Iranian economy and Tehran Stock Exchange from 2004-2016 were used to estimate the model. The results showed that direct fluctuations from the oil market to the stock market and oil price have a long-term positive impact on the stock index. Short-term oil price shocks have also a more significant impact on the stock index.Given the important impact of oil price changes on Iran’s oil revenues as an oil exporting country and its effects on the oil economy, especially in the stock market, the effect of oil price changes was investigated using the VARX-DCC-GARCH model. As advantages of this model, it allows investigating the effect of volatility of variables from average and variance (volatility) in a model. It also considers the oil price as an exogenous variable affecting short-term, long-term and time-variable relationships. Furthermore, VARX-DCC-GARCH considers correlations between volatility of variables. Monthly data of the Iranian economy and Tehran Stock Exchange from 2004-2016 were used to estimate the model. The results showed that direct fluctuations from the oil market to the stock market and oil price have a long-term positive impact on the stock index. Short-term oil price shocks have also a more significant impact on the stock index.