Assessing the Asymmetric Effects of Economic Uncertainty on the Efficiency of Iran's Financial System: A NARDL Approach

Articles in Press

Document Type : Research Paper

Authors

1 سمنان بلوار 17 شهریور خیابان هجرت اصلی پلاک 55 طبقه اول

2 PhD student in finance-financial engineering, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran

3 Associate Professor, Department of Accounting, Faculty of Economics, Management and Administrative Sciences, Semnan University, Semnan, Iran

10.22034/ecoj.2025.67512.3435

Abstract

Economic uncertainty, is recognized as one of the key potential determinants that can undermine the efficiency of financial systems. In developing economies such as Iran, characterized by fragile institutional structures and heightened sensitivity to policy shocks, this phenomenon may significantly affect financial system performance by destabilizing macroeconomic indicators and reducing market participants’ confidence. Since the financial system’s response to positive and negative shocks of economic uncertainty is not necessarily symmetric, examining its asymmetric effects is of particular importance, as such an approach provides deeper insights into the transmission mechanisms of uncertainty and its consequences. Accordingly, this study employs quarterly data for the period 1997–2023 to analyze the asymmetric effects of economic uncertainty on the efficiency of Iran’s financial system. The novelty of this research lies in the application of a nonlinear and asymmetric framework based on the Nonlinear Autoregressive Distributed Lag (NARDL) model, which enables the distinction and comparison between the effects of positive and negative shocks. In the first stage, an economic uncertainty index is constructed using macroeconomic variables through a combination of the GARCH model and Principal Component Analysis (PCA). Subsequently, statistical properties of the data are examined, confirming the suitability of the NARDL approach. The findings reveal that, in both the short and long run, negative shocks of economic uncertainty improve the efficiency of the financial system, whereas positive shocks weaken it. Moreover, variables such as foreign direct investment, education level, and trade volume exert positive and significant effects on the efficiency of the financial system.

Keywords

Main Subjects

Quarterly Journal of Applied Theories of Economics

Articles in Press, Accepted Manuscript
Available Online from 16 September 2025

Files

Share

How to cite

Statistics