Transmission of Volatility between Stock Markets of Iran, India and Turkey Using BEKK-GARCH Model

Internationalization of financial markets has caused what is happening in a country to be felt quickly in other countries. This affects the returns and risks of securities listed in the stock exchange; therefore, it is necessary to identify and analyze the relationship between stock markets properly. For this purpose, two goals are pursued in this paper; investigating the impact of the Indian and Turkish stock markets on the Iranian stock market, and investigating the effect of the Iranian stock market on the stock markets of India and Turkey. Theoretical Framework
The past decade has experienced financial and economic crises affecting economic development and evaluation principles. Due to the turbulence of the crisis, financial analysts and market participants feared that the overflow of the crisis into other economies might boost instability in global financial markets. Experience has shown that the effects and the extent of the spread of crises vary in scope and quality. For example, the financial turmoil in the Turkish stock market in 2001 was completely independent and had no impact on other markets (Desai, 2003), while Mexican and Asian crises had regional implications (Glyctic & Rose, 1999). In contrast, the Russian financial crisis of 1998 increased the volatility of global security of markets with enormous adventures (International Settlement Bank, 1999).
Today, financial markets are moving towards integration more than before, and countries have close economic relations in addition to their cultural and political ties. This is in many respects positive, but it also brings about many changes in the financial and economic system of countries (Ahmadzadeh, Heydari & Zolfaghari, 2012).
According to experts, since the recession in the United States and European countries, which led to bank failures and subsequent downsizing in the economy of these countries, the demand for energy and oil will reduce world oil prices. Some countries (e.g., oil-dependent economies) will face with lots of problems. At the outset of the crisis, it was a misconception that Iran would not take any effect from this crisis and could even be an ideal opportunity for the Iranian economy, but over time, the effects of the crisis put new challenges to the Iranian economy including a dramatic drop in oil revenues, a recession in the global market, decrease in non-oil exports, and consequently, drop of Tehran’s stock market.
The purpose of this paper is to examine whether fluctuations in the stock market of countries with which Iran has a good economic relationship is transferred to the stock market of Iran. For this purpose, two goals are pursued in this paper; investigating the impact of the Indian and Turkish stock markets on the Iranian stock market, and investigating the effect of the Iranian stock market on the stock markets of India and Turkey.

In this regard, this relationship is examined as Couples between the stock market of Iran and stock markets of Turkey and India. In this research, which focuses on the fluctuation modeling in the stock market of Iran and two Asian stock markets, a multivariate GARCH model has been developed which is used to examine the transmission of fluctuations between price indices of Iranian stock market, the Turkish stock market and the Indian stock market. The relationship between stock markets of Iran, Turkey and India has been evaluated using daily stock price data for the period 2007-2013 and the BEKK-GARCH model (Angel & Keroni, 1995).

The results show that the domestic markets with one-period lagged residual have a direct effect on all three countries. Regarding the domestic markets, the coefficients of ARCH and GARCH are significant for all three countries. This means that the fluctuations of the stock market index of the three countries of Iran, India and Turkey have a statistically significant relationship with previous fluctuations; however, no relationship between the Iranian stock market and the stock markets of India and Turkey was found. In other words, there is no apparent fluctuation transmission from the stock market index of Iran to Turkey, and vice versa. With respect to the Indian Stock exchange, the same results were achieved.
Although the international transfer of stock market volatility may affect the decisions made by the firm's capital budget, investors' consumption decisions, and other business cycles, under such circumstances, it may be argued that because of the insignificant relationship between the Iranian financial market and the global markets, the possibility of a crisis spreading from the Iranian economy to world markets is not possible, but there is still concern about the impact of the global economic crisis on the Iranian economy. Perhaps, its direct effect is to reduce global demand for crude oil, which will increase the pace of the global crisis in the Iranian economy, given the strong dependence of Iran's economic budget on oil revenues.