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Investigation of the volatility spillover effect and dynamic conditional correlations in Tehran Stock Exchange using wavelet-based Bayesian conditional variance heteroscedasticity

S.a Hoseeini Ebrahimabad (), Kh Jahangiri (), M Ghaemi Asl () and H Heydari ()
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S.a Hoseeini Ebrahimabad: Ph.D. Student in Economics, Urmia University
Kh Jahangiri: Assistant Professor of Financial Economics, Urmia University
M Ghaemi Asl: Assistant Professor of Islamic Economics and Banking, Kharazmi University
H Heydari: Professor of Economics, Urmia University

Quarterly Journal of Applied Theories of Economics, 2020, vol. 7, issue 1, 149-184

Abstract: Skewness, fat tails and frequency dimension are important features of financial time series that have not been taken into account in classical econometric models. Therefore, in this study, the Bayesian method for conditional variance heteroscedasticity based on wavelet analysis has been used to investigate the volatility spillover effect and dynamic conditional correlations in three sub-periods between the daily return data of selected Tehran Stock Exchange (TSE) indices during the period from December 14, 2008 to April 20, 2019. Sub-periods are defined according to the Iran nuclear deal and agreement between Iran and the P5+1, known as Joint Comprehensive Plan of Action (JCPOA), which includes the pre-JCPOA period, JCPOA period, and the period after United States withdrawal from the JCPOA. The results of the Bayesian DCC GARCH (1,1) model, with the rejection of the constant conditional correlation hypothesis versus the dynamic conditional correlation hypothesis based on posterior marginal distribution in all subsections, indicates that the impact of shocks on the volatility of stock returns in wavelets and sub-periods are not the same. Also, Bayesian dynamic conditional correlation graphs are recommended for each sub-periods and in each wavelet, a different stock for a suitable investment

Keywords: Spillovers Effect; Conditional Variance; Bayesian Approach; Selected Indices of the Tehran Stock Exchange (search for similar items in EconPapers)
JEL-codes: C32 C53 E32 G11 (search for similar items in EconPapers)
Date: 2020
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