The Effect of Global and Regional Geopolitical Risk on the Return and Volatility of the Tehran Stock Exchange Price Index Using the Mixed Data Sampling (MIDAS) Approach
Keywords:
Geopolitical risk, stock return volatility, GARCH-MIDASAbstract
Geopolitical risks stemming from global and regional events can play a significant role in shaping asset price volatility. However, there is limited empirical evidence on how these risks influence return volatility in emerging markets, including Iran's capital market. This study examines the impact of geopolitical risks on the return volatility of the Tehran Stock Exchange using the GARCH-MIDAS hybrid model, which allows for the integration of high- and low-frequency data. In this research, quarterly data on the Tehran Stock Exchange Price Index is used as the dependent variable, while monthly geopolitical risk indices serve as the independent variables. The global indices include the Geopolitical Threat Index (GPT) and the Geopolitical Acts Index (GPA), and the regional indices cover the geopolitical risk levels of four countries: Russia, Ukraine, Turkey, and Saudi Arabia. The results obtained from model estimation indicate that geopolitical risks associated with Turkey and Ukraine have significant and varying effects on the daily return volatility of the Tehran Stock Exchange. In particular, Turkey’s geopolitical risk index has demonstrated a notable impact on market fluctuations during specific time intervals. In contrast, there is no strong or consistent evidence of significant effects from the indices related to Russia and Saudi Arabia. The study’s findings suggest that while regional geopolitical risks have a limited overall impact on Iran's capital market, risks linked to Turkey and Ukraine have, at times, led to considerable volatility. These results highlight the importance of incorporating geopolitical risk into modeling and forecasting return volatility in emerging markets—especially in Iran’s capital market—and provide a basis for policymaking by investors and regulatory bodies.
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