Threshold Effects of Political Factors on Oil Market Volatility and Stock Returns in Iran with Emphasis on Global Financial Cycles
Keywords:
Oil market, stock returns, global financial cycles, threshold approach modelAbstract
The aim of this article is to identify political factors affecting oil market volatility and stock returns with an emphasis on global financial cycles. To this end, the Smooth Transition Autoregressive (STAR) model was applied using annual data of the Iranian economy during the period 1991–2023. According to the results of the nonlinear part of the model (second regime), a one percent increase in control of corruption, financial development, trade openness, government size, and gross domestic product respectively increases stock returns by 1 percent, 4 percent, 6 percent, 1 percent, and 5 percent. Variables such as U.S. interest rates, global gold prices, exchange rate fluctuations, and inflation rate also show a positive relationship with crude oil price volatility. Specifically, a one percent increase in U.S. interest rates, global gold prices, exchange rate fluctuations, and inflation rate increases crude oil price volatility by 12, 2, 16, and 7 percent, respectively. Moreover, global gold prices, bank lending rates, exchange rate fluctuations, and inflation rate exhibit a negative relationship with stock returns, while control of corruption, democracy, financial development, and gross domestic product reduce crude oil price volatility. Among stock market indices, the refining and petrochemical sectors are more sensitive in the Iranian stock exchange due to their direct relationship with global markets, with approximately 30 percent of Iran’s market value directly dependent on oil prices. Therefore, it can be concluded that the Tehran Stock Exchange, like global stock exchanges, is fully influenced by oil prices, and it is expected that prices derive their greatest impact from oil. Although the decline in global crude oil prices can affect the country’s public budget and lead to a potential budget deficit, the fall in oil prices—depending on the type of activity of different industries—can have broader impacts on the overall stock market indices.
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