The Effect of Political and Economic Uncertainty on the Instability of the Banking Sector in Tehran Stock Exchange (time-varying parameter approach)

The main purpose of this study is to investigate the impact of economic uncertainty and government policies on the price volatility of the banking sector in the Tehran Stock Exchange, considering the structural instability in the model parameters. In this regard, in order to estimate the uncertainty of the variables, a variety of symmetric, asymmetric and non-linear GARCH models were estimated, and finally, based on the information criteria and the significance of the asymmetry coefficients, the EGARCH model was selected as the optimal model. In the following, the effect of uncertainty Indicators on the instability of the banking sector index was investigated by the time-varying parameter autoregressive (TVP-VAR). In this research, monthly data were used in the period of 2010:7-2020:9. The results of the final estimation of the research model indicate that the impact coefficients of uncertainty indicators on the instability of the banking sector are variable. In such a way that the effect of the uncertainty of government policies (uncertainty of tax revenues) on the instability of the banking sector estimated negative at the beginning and positive at the end of the period. Based on the impulse response function (IRF), the effect of inflation uncertainty as the indicator of economic uncertainty on the instability of the banking sector is positive. Also, the impact of government policy uncertainty through the exchange rate uncertainty channel has had a positive impact on the volatility of the banking sector in the stock exchange. However, the uncertainty of government policies based on the uncertainty index of tax revenues has had a negative impact on the price volatility of the banking sector, and this impact has gradually decreased.