The Transition Mechanism of Foreign Exchange Crisis on Iran Stock Market Using Markove Switching Approach

Because of the sanctions imposed on Iran and the reduction of foreign exchange earnings, the capital market has undergone significant changes. This study tries to provide the transition mechanism of foreign exchange crisis on the stock market and compare with other emerging countries. In order to obtain the results, using the monthly data of the period of 2009:01–2020:03 and using the nonlinear Markov switching approach. For this purpose, among the various modes of Markov switching model, MSIAH (2) –VAR (2) has been selected. The empirical findings of the study show that only in a regime with high fluctuations, the increase in the exchange rate has increased the stock index while the stock index has no impact on the exchange rate. In addition, the results indicate that the sustainability of the stock index in the regime with the low fluctuations (first regime) was more than that of the regime with the high fluctuations (second regime).