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Uncertainty and energy-sector equity returns in Iran: a Bayesian and quasi-Monte Carlo time-varying analysis

Babak Fazelabdolabadi ()
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Babak Fazelabdolabadi: Research Institute of Petroleum Industry (RIPI)

Financial Innovation, 2019, vol. 5, issue 1, 1-20

Abstract: Abstract This study investigates whether the implied crude oil volatility and the historical OPEC price volatility can impact the return to and volatility of the energy-sector equity indices in Iran. The analysis specifically considers the refining, drilling, and petrochemical equity sectors of the Tehran Stock Exchange. The parameter estimation uses the quasi-Monte Carlo and Bayesian optimization methods in the framework of a generalized autoregressive conditional heteroskedasticity model, and a complementary Bayesian network analysis is also conducted. The analysis takes into account geopolitical risk and economic policy uncertainty data as other proxies for uncertainty. This study also aims to detect different price regimes for each equity index in a novel way using homogeneous/non-homogeneous Markov switching autoregressive models. Although these methods provide improvements by restricting the analysis to a specific price-regime period, they produce conflicting results, rendering it impossible to draw general conclusions regarding the contagion effect on returns or the volatility transmission between markets. Nevertheless, the results indicate that the OPEC (historical) price volatility has a stronger effect on the energy sectors than the implied volatility has. These types of oil price shocks are found to have no effect on the drilling sector price pattern, whereas the refining and petrochemical equity sectors do seem to undergo changes in their price patterns nearly concurrently with future demand shocks and oil supply shocks, respectively, gaining dominance in the oil market.

Keywords: Quasi-Monte Carlo; Bayesian optimization; Bayesian network; Oil volatility index (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:spr:fininn:v:5:y:2019:i:1:d:10.1186_s40854-019-0128-2