American Journal of Applied Sciences

Analysis of Financial Markets Integration of Iran Within the Middle East and with the Rest of the World

Parinaz Ezzati

DOI : 10.3844/ajassp.2013.1492.1508

American Journal of Applied Sciences

Volume 10, Issue 12

Pages 1492-1508

Abstract

It is universally argued that Iran’s financial markets are effectively isolated from the rest of the world. However, in the last three years, privatization increased in Iranian financial markets as well as capitalization, Foreign Direct Investment (FDI) and equity prices, albeit with suspicion of reaching the bubble level. Questions are raised whether Iran is still isolated from the rest of the world. To see whether argument in relation to isolation of Iranian financial markets is true and to better understand Iran’s financial development, we estimate financial interdependencies of Iran within the Middle East and with the rest of the world based on the important recycling of petrodollars. For this analysis monthly financial data from equity, money and foreign exchange markets are applied over 12 years. Integration of each of these markets are analysed in turn for Iran within the region and with the rest of the world. Auto-Regressive Distributed Lag (ARDL) cointegration method is conducted to analyse the interdependencies among the financial markets after the application of unit root test in presence of structural breaks. We found that Iran has fairly independent and isolated foreign exchange market. However, its equity and money markets are integrated within the Middle East and with the rest of the world. Iran is neither completely segregated nor fully integrated with the rest of the world; it is still controversial whether Iran should be considered as a good choice for international portfolio diversification based on its segregated nature.

Copyright

© 2013 Parinaz Ezzati. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.