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Estimating Financial Stress in the Iranian Economy and Its Impact on the Overall Index of the Tehran Stock Exchange
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Alinaghi Rafieiemam1   , Ghahreman Abdoli2 , Mohsen Mehrara3 |
1- PhD student in Financial Economics, University of Tehran, Kish International Campus
2- Professor, Department of Economics, University of Tehran, Tehran, Iran. , Abdoli@ut.ac.ir
3- Professor, Department of Economics, University of Tehran, Tehran, Iran. |
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Abstract: (17 Views) |
The financial stress index, as a key indicator of fluctuations in the macroeconomy, has not yet been officially estimated by national statistical institutions in Iran. Consequently, comprehensive investigations into its impact on financial markets have also been lacking. This study aims to address this gap by proposing an estimation methodology and examining the effect of the financial stress index on the Tehran Stock Exchange (TSE). The analysis is based on quarterly data spanning from 2001 to 2023 (Iranian calendar years 1380–1402). To estimate financial stress, a dynamic factor model within a state-space framework is employed. Furthermore, Granger causality tests within Markov-switching models and a Markov-switching vector autoregressive (MS-VAR) model are utilized to assess the dynamic interactions and regime-dependent effects.
The empirical findings indicate that an increase in financial stress under normal economic conditions leads to a rise in the stock market index. However, under high-stress regimes, further increases in financial stress result in only marginal growth—or even stagnation—in the index. This phenomenon can be attributed to the destabilizing effects of elevated financial stress on financial markets. Additional results provide insights into the probabilities of being in either stress or normal regimes at each point in time, as well as the transition probabilities between these regimes. Notably, the stress regime exhibited greater persistence compared to the normal regime over the study period, which is consistent with the series of economic shocks that the Iranian economy has experienced over recent decades—rendering such persistence both natural and unavoidable.
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Article number: 10 |
| Keywords: Financial Stress, Stock Exchange, Financial Markets |
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Full-Text [PDF 1181 kb]
(7 Downloads)
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Article type: Research |
Subject:
Special
Received: 2025/06/10 | Accepted: 2025/09/8 | Published: 2026/01/30
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