Linear and Nonlinear Causality between Stock Market Volatility and the business Cycle in Iran

Abstract

This paper surveys the relationship between stock market volatility and the business cycle in the Iranian economy, where both linear and nonlinear bivariate causality tests are used in the survey. The monthly data of the World Bank from 2000 to October 2016 is used in this survey. The results advocate that there is one-sided linear causality between the business cycle and the stock market volatility, likewise, nonlinear relationship between the two mentioned variables is confirmed. It means that the results of the Granger causality in two-sided analysis show that there is a one-side linear relationship from business cycles to stock market volatility in Iran. On the other hand, by using a nonlinear method, the assumption of nonlinear causality from business cycles to stock market volatility was confirmed, while the results didn’t approve the assumption of linear and nonlinear causality from stock market volatility to business cycles. Therefore, to decision making in macroeconomic issues and investors in stock market, nonlinear relationships between macro-variables should be considered alongside linear causality, as it seems that the business cycles can have an impact on the stock market volatility in Iran, so, Investors can make their investment strategies in the stock market based upon the change in the business cycle.