Investigating the effect of asset market fluctuations on the financial crisis of the economy: Markov switching application

Increasing convergence and impact of the asset market, especially financial assets in recent decades, has focused researchers on understanding how they affect and in fact the transmission or inter-market fluctuations and their impact on each other. In order to investigate the effect of exchange rate fluctuations, oil prices and stock market index on the financial instability index using the Markov Switching rotation model, during the period 1397-1387, monthly data have been studied. The Toolbox-Violet wavelet transform model has been used to extract exchange rate fluctuations, oil prices and stock market indices. The results show that the effect of exchange rate fluctuations in different regimes and different time periods is different, so that in the short term exchange rate fluctuations in the regime above the financial instability index have a different effect than other periods has time. Fluctuations in oil prices in the medium and long term, regardless of the financial instability regime, have a positive and significant effect, and this effect will be stronger in the long run. Also, stock market fluctuations have a negative and significant effect only in the short-term and in conditions where the financial instability index in the regime is low. These results show that fluctuations have different effects according to the time period as well as the level of financial instability. Therefore, the management of foreign exchange and stock markets in the country should be done according to the level of financial instability and also the time period of fluctuations.