The Effect of Geopolitical Risk on Tehran Stock Exchange Market Volatility: An Intelligent Approach from the Midas-GARCH Model

Abstract

Geopolitical risks, as one of the macro factors of the economic environment, play an important role in shaping the behavior of financial markets. The aim of this study is to examine the impact of global and regional geopolitical risks on the returns and fluctuations of the Iranian capital market during the period 2009-2024. The statistical population of the study includes all selected indices of the Tehran Stock Exchange and international indices related to geopolitical risk, and the samples have been selected purposefully. To analyze data with different time frequencies, the advanced MIDAS-GARCH model has been used. The results show that global and regional geopolitical risks significantly affect the volatility of the Tehran Stock Exchange, while no direct effect is observed on the average level of index returns. This suggests that the effect of geopolitical risk is transmitted more through investors’ psychological and expected path and increased market uncertainty than through fundamental changes in corporate cash flows. Regional analyses showed that the Iranian capital market is more sensitive to geopolitical risks of close neighbors (such as Turkey, Saudi Arabia, Ukraine, and Russia), while global risks have a smaller impact on returns and volatility. Also, the equally weighted index of the stock market shows greater resistance to geopolitical shocks compared to the total index, and the effect of volatility caused by these risks on large export-oriented companies is partially moderated by an increase in the exchange rate. The findings highlight the importance of developing hedging instruments, strengthening the geopolitical risk monitoring system, and supporting sensitive industries and small and medium-sized companies for optimal management of capital market fluctuations.