Examining the Asymmetric Effects of Economic Policy Uncertainty on the Efficiency of Iran’s Financial System: An NARDL Approach

Document Type : Research Paper

Authors

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

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

Abstract

Economic uncertainty, as an exogenous and volatile variable, is recognized as a key factor potentially undermining the efficiency of financial systems. In developing economies such as Iran, which are characterized by fragile institutional structures and high sensitivity to policy shocks, this phenomenon can significantly affect financial system performance and efficiency by creating instability in macroeconomic indicators and reducing market participants’ confidence. Since the financial system’s response to positive and negative shocks of economic uncertainty is not necessarily symmetrical, examining its asymmetric effects is particularly important, as this approach provides a more accurate understanding of the transmission mechanisms of uncertainty and its consequences. Accordingly, this study analyzes the asymmetric effects of economic uncertainty on the efficiency of Iran’s financial system using quarterly data from 1997 to 2023. The innovation of this study lies in the application of a nonlinear and asymmetric framework based on the Nonlinear Autoregressive Distributed Lag (NARDL) model, which allows for the separation and comparison of the effects of positive and negative shocks. In the first step, the economic uncertainty index was estimated using macroeconomic variables through a combination of the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model and Principal Component Analysis (PCA). Subsequently, the statistical properties of the data—including stationarity, nonlinear dependence, cointegration, and the asymmetry of shocks—were examined, confirming the suitability of the NARDL model. The findings indicate that, in both the short and long term, negative economic uncertainty shocks improve financial system efficiency, whereas positive shocks weaken it. Moreover, variables such as foreign direct investment, education level, and trade volume have positive and significant effects on the efficiency of the financial system.

Keywords

Main Subjects

References

  1. Adeloye, F. C., Olawoyin, O., & Daniel, C. (2024). Economic policy uncertainty and financial markets in the united state. International Journal of Research and Innovation in Social Science, 8(6), 998-1016.
  2. Adibian, M. S., Ebrahimi Salari, T., & Esmaeilpour Moghadam, H. (2025). How is the Iranian stock market affected by geopolitical risk and economic policy uncertainty in China, the US and the global?. Iranian Journal of Accounting, Auditing and Finance, 9(1), 131-159.
  3. Aharon, D. Y., Baig, A. S., & Butt, H. A. (2023). The role of education in capital markets’ liquidity. Journal of International Financial Markets, Institutions and Money, 86, 101805.
  4. Ajmi, A. N., Aye, G. C., Balcilar, M., El Montasser, G., & Gupta, R. (2015). Causality between US economic policy and equity market uncertainties: Evidence from linear and nonlinear tests. Journal of Applied Economics, 18(2), 225-246.
  5. Akhgar, M. O. , Sajjadi, Z. and Rasooli kordestani, N. (2023). Uncertainty in Economic Policy and Corporate Risk-taking: Product Market Competition, Financial Friction, and Financialization. Accounting and Auditing Review, 30(4), 614-658 (In Persian).
  6. Ali, K., Hongbing, H., Liew, C. Y., & Jianguo, D. (2023). Governance perspective and the effect of economic policy uncertainty on financial stability: Evidence from developed and developing economies. Economic Change and Restructuring, 56(3), 1971-2002.
  7. Allen, D. E., & McAleer, M. (2021). A Nonlinear Autoregressive Distributed Lag (NARDL) Analysis of the FTSE and S&P500 Indexes. Risks, 9(11), 195.
  8. Al-Thaqeb, S. A., & Algharabali, B. G. (2019). Economic policy uncertainty: A literature review. The Journal of Economic Asymmetries, 20, e00133.
  9. Aman, A., Anwar, S., Khan, M. A., Haddad, H., Al-Ramahi, N. M., & Khan, M. A. (2024). Economic policy uncertainty and financial system efficiency. Heliyon, 10(10).
  10. Aminian, T., Saraf, F., Emamverdi, G., & Baghani, A. (2018). Asymmetric effects of oil price shocks and economic policies uncertainty on industry stock returns. Journal of Securities Exchange, 11(43), 5–22 (In Persian).
  11. Amiri, H., & Pirdadeh Beyranvand, M. (2020). Uncertainty about economic policies and the stock market in Iran based on Markov switching model. Financial Knowledge of Security Analysis 12(44), 49-67 (In Persian).
  12. Ashena, M. and Lale Khezri, H. (2023). The Relationship between Uncertainty of Money Market and Exchange Rate Market with Economic Instability in Iran. Quarterly Journal of Applied Theories of Economics, 10(3), 173-200.
  13. Ashraf, B. N., & Shen, Y. (2019). Economic policy uncertainty and banks’ loan pricing. Journal of Financial Stability, 44, 100695.
  14. Bagherzadeh Azar, F., Mohseni Zonouzi, S. J., & Mansourfar, G. (2020). The nonlinear relationship between the uncertainty of government economic policies and economic growth of Iran with emphasis on the development of financial markets in a novel GAS model framework. Quarterly Journal of Applied Theories of Economics, 7(2), 103–128 (In Persian).
  15. Bagherzadeh Houshmandi, K., & Taman, S. (2017). The impact of fiscal policies on stock market value in Iran. 2nd International Conference on New Horizons in Management, Accounting, Economics, and Entrepreneurship of Iran, Tehran (In Persian).
  16. Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636.
  17. Bashiri, S., Pahlevani, M., & Boostani, R. (2016). Stock market fluctuations and monetary policy in Iran. Economic Modelling Research, 7(23), 103–157 (In Persian).
  18. Bloom, N. (2009). The impact of uncertainty shocks. Econometrica, 77(3), 623-685.
  19. Bordo, M. D., Duca, J. V., & Koch, C. (2016). Economic policy uncertainty and the credit channel: Aggregate and bank level US evidence over several decades. Journal of Financial Stability, 26, 90-106.
  20. Broock, W. A., Scheinkman, J. A., Dechert, W. D., & LeBaron, B. (1996). A test for independence based on the correlation dimension. Econometric reviews, 15(3), 197-235.
  21. Brooks, C. (2019). STATA guide for introductory econometrics for finance. Cambridge University Press.
  22. Caldara, D., & Iacoviello, M. (2022). Measuring Geopolitical Risk. American Economic Review, 112(4), 1194–1225.
  23. Chi, Q., & Li, W. (2017). Economic policy uncertainty, credit risks and banks’ lending decisions: Evidence from Chinese commercial banks. China Journal of Accounting Research, 10(1), 33-50.
  24. Dai, P. F., Xiong, X., & Zhou, W. X. (2021). A global economic policy uncertainty index from principal component analysis. Finance Research Letters, 40, 101686.
  25. Danisman, G. O., Ersan, O., & Demir, E. (2020). Economic policy uncertainty and bank credit growth: Evidence from European banks. Journal of Multinational Financial Management, 57, 100653.
  26. Dash, S. R., Maitra, D., Debata, B., & Mahakud, J. (2021). Economic policy uncertainty and stock market liquidity: Evidence from G7 countries. International Review of Finance, 21(2), 611-626.
  27. Debata, B., & Mahakud, J. (2018). Economic policy uncertainty and stock market liquidity: Does financial crisis make any difference?. Journal of Financial Economic Policy, 10(1), 112-135.
  28. Degiannakis, S., Filis, G., & Panagiotakopoulou, S. (2018). Oil price shocks and uncertainty: How stable is their relationship over time?. Economic Modelling, 72, 42-53.
  29. Desalegn, T. A., Zhu, H., & Borojo, D. G. (2023). Economic policy uncertainty, bank competition and financial stability. Journal of Financial Economic Policy, 15(2), 123-139.
  30. Dindar farkoushy, P. , Panahian, ,. H. and jabbari, H. (2021). Economic Uncertainty and Stock Price Crash Risk Companies Listed in Tehran Stock Exchange. Accounting and Auditing Research, 13(51), 143-164 (In Persian).
  31. Engle, R. F., & Granger, C. W. (1987). Co-integration and error correction: representation, estimation, and testing. Econometrica: journal of the Econometric Society, 5(22), 251-276.
  32. Georgescu, I., & Kinnunen, J. (2025). Nonlinear ARDL analysis of economic growth, nuclear energy, and innovation’s asymmetric effects on Finland’s load capacity factor. SN Business & Economics, 5(37), 1-26.
  33. Ghirelli, C., Gil, M., Pérez, J. J., & Urtasun, A. (2021). Measuring economic and economic policy uncertainty and their macroeconomic effects: The case of Spain. Empirical Economics, 60(2), 869-892.
  34. Gong, X., Chang, B. H., Chen, X., & Zhong, K. (2023). Asymmetric effects of exchange rates on energy demand in E7 countries: new evidence from multiple thresholds nonlinear ARDL model. Romanian Journal of Economic Forecasting, 26(2), 125.
  35. Guenich, H., Hamdi, K., & Chouaibi, N. (2022). Asymmetric response of investor sentiment to economic policy uncertainty, interest rates and oil price uncertainty: Evidence from OECD countries. Cogent Economics & Finance, 10(1), 2151113.
  36. Guo, P., Zhu, H., & You, W. (2018). Asymmetric dependence between economic policy uncertainty and stock market returns in G7 and BRIC: A quantile regression approach. Finance Research Letters, 25, 251-258.
  37. Heydatpour, D., Safavi, B., & Khezri, M. (2022). The impact of economic instability on Iran’s stock market with an emphasis on the Economic Policy Uncertainty (EPU) index. Journal of Economics and Business Research, 13(25), 49–67 (In Persian).
  38. Hu, S., & Gong, D. (2019). Economic policy uncertainty, prudential regulation and bank lending. Finance Research Letters, 29, 373-378.
  39. Huang, Y., & Luk, P. (2020). Measuring economic policy uncertainty in China. China Economic Review, 59, 101367.
  40. Huang, Y., & Wang, X. (2017). Building an efficient financial system in China: A need for stronger market discipline. Asian Economic Policy Review, 12(2), 188-205.
  41. Jing, Z., Lu, S., Zhao, Y., & Zhou, J. (2023). Economic policy uncertainty, corporate investment decisions and stock price crash risk: Evidence from China. Accounting & Finance, 63, 1477-1502.
  42. Karnizova, L., & Li, J. C. (2014). Economic policy uncertainty, financial markets and probability of US recessions. Economics Letters, 125(2), 261-265.
  43. Khan, M. A., Khan, M. A., Khan, M. A., Haddad, H., Al-Ramahi, N. M., & Sherfudeen, N. (2023). Country-level institutional quality and financial system efficiency: An international evidence. Plos one, 18(8), e0290511.
  44. Kong, Q., Li, R., Wang, Z., & Peng, D. (2022). Economic policy uncertainty and firm investment decisions: Dilemma or opportunity? International Review of Financial Analysis, 83, 102301.
  45. Liang, C. C., Troy, C., & Rouyer, E. (2020). US uncertainty and Asian stock prices: Evidence from the asymmetric NARDL model. The North American Journal of Economics and Finance, 51, 101046.
  46. Liu, J., & Wang, H. (2022). Economic policy uncertainty and the cost of capital. International Review of Financial Analysis, 81, 102070.
  47. Loni, S. , Abbasian, E. and Haji, G. (2021). The Effect of Economic Policy Uncertainty on Corporate Investment: Evidence from Companies Listed on the Tehran Stock Exchange. Financial Research Journal, 23(2), 249-268 (In Persian).
  48. Lu, H., Gao, Q., & Yick, H. Y. (2023). Economic policy uncertainty and its mediating effect on leverage on the adjustment speed of corporate investment–evidence from China. Applied Economics Letters, 30(20), 2934-2946.
  49. Ludvigson, S. C., Ma, S., & Ng, S. (2021). Uncertainty and business cycles: exogenous impulse or endogenous response?. American Economic Journal: Macroeconomics, 13(4), 369-410.
  50. Ma, L., & Hao, Y. (2020). Policy uncertainty and financial frictions: Evidence from China. China Economic Review, 62, 101483.
  51. Mbanyele, W. (2023). Economic policy uncertainty and stock liquidity: The role of board networks in an emerging market. International Journal of Emerging Markets, 18(1), 122-147.
  52. Meng, X., Guo, H., & Li, J. (2023). Economic policy uncertainty and corporate investment: Evidence from China. Economic Change and Restructuring, 56(6), 4491-4529.
  53. Mujtaba, A., Jena, P. K., Mishra, B. R., Kyophilavong, P., Hammoudeh, S., Roubaud, D., & Dehury, T. (2022). Do economic growth, energy consumption and population damage the environmental quality? Evidence from five regions using the nonlinear ARDL approach. Environmental Challenges, 8, 1-27.
  54. Nguyen, C. P., Su, T. D., Wongchoti, U., & Schinckus, C. (2020). The spillover effects of economic policy uncertainty on financial markets: A time-varying analysis. Studies in Economics and Finance, 37(3), 513-543.
  55. Nguyen, Q., Kim, T., & Papanastassiou, M. (2018). Policy uncertainty, derivatives use, and firm-level FDI. Journal of International Business Studies, 49, 96-126.
  56. Nusair, S. A., & Al-Khasawneh, J. A. (2022). Impact of economic policy uncertainty on the stock markets of the G7 countries: A nonlinear ARDL approach. The Journal of Economic Asymmetries, 26, e00251.
  57. Nyoni, T. (2018). Modeling and forecasting inflation in Kenya: Recent insights from ARIMA and GARCH analysis. Dimorian Review, 5(6), 16-40.
  58. Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of Applied Econometrics, 16(3), 289-326.
  59. Petrovic, D., & Karanovic, G. (2024). Financial institutions efficiency: a systematic literature review. Zbornik radova Ekonomskog fakulteta u Rijeci: časopis za ekonomsku teoriju i praksu, 42(2), 411-446.
  60. Pourhosseini, S. H., Sharifi Renani, H., & Daei Karimzadeh, S. (2023). The relationship between economic policy uncertainty shocks and stock market illiquidity using time-varying structural vector autoregression (TVSVAR) model. Capital Market Analysis, 3(2), 84–105 (In Persian).
  61. Reda, A. M., & Nourhan, E. (2020). Using the ARDL bound testing approach to study the inflation rate in Egypt. Economic Consultant, 3 (31), 24-41.
  62. Ro, Y. J., Kim, I. C., & Kim, J. W. (2017). Financial development and investment in Korea. Emerging Markets Finance and Trade, 53(3), 534-543.
  63. Samsami, H., & Ebrahimnejad, A. (2019). The Impact of the Economic Policy Uncertainty on the Entrepreneurship and Unemployment in Iranian Economy, Simultaneous Equations System Approach. Journal of Economic Research, 54(4), 995-1016 (In Persian).
  64. Shabir, M., Jiang, P., Bakhsh, S., & Zhao, Z. (2021). Economic policy uncertainty and bank stability: Threshold effect of institutional quality and competition. Pacific-Basin Finance Journal, 68, 101610.
  65. Shahri, M. E., Azari, M., & Ramezani, Y. (2024). Drivers, Uncertainties, and Scenarios of the Iranian Economic System. International Journal of Management, Accounting & Economics, 11(6), 699-720.
  66. Shao, H., Zhou, B., Wang, D., & An, Z. (2024). Navigating Uncertainty: The Micro-Level Dynamics of Economic Policy Uncertainty and Systemic Financial Risk in China’s Financial Institutions. Journal of the Knowledge Economy, 16, 1-31.
  67. Sharma, A. K. (2024). Asymmetric nexus between economic policy uncertainty and the Indian stock market: Evidence using NARDL approach. The Quarterly Review of Economics and Finance, 93, 91–101.
  68. Shin, Y., Yu, B., & Greenwood-Nimmo, M. (2014). Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. Festschrift in honor of Peter Schmidt: Econometric methods and applications, 281-314.
  69. Stoian, A., & Iorgulescu, F. (2020). Fiscal policy and stock market efficiency: An ARDL bounds testing approach. Economic Modelling, 90, 406-416.
  70. Tran, Q. T. (2019). Economic policy uncertainty and corporate risk-taking: International evidence. Journal of Multinational Financial Management, 52, 100605.
  71. Wang, Y., Chen, C. R., & Huang, Y. S. (2014). Economic policy uncertainty and corporate investment: Evidence from China. Pacific-Basin Finance Journal, 26, 227-243.
  72. Wen, J., Khalid, S., Mahmood, H., & Yang, X. (2022). Economic policy uncertainty and growth nexus in Pakistan: A new evidence using NARDL model. Economic Change and Restructuring, 55(3), 1701-1715.
  73. Xu, W., Rao, W., Wei, L., & Wang, Q. (2023). A normalized global economic policy uncertainty index from unsupervised machine learning. Mathematics, 11(15), 1-10.
  74. Xuan, V. N. (2025). An ARDL Approach to Investigating the Relationship between FDI, Renewable Energy, Economic Growth, Trade Openness, and CO₂ Emissions in Australia. Results in Engineering, 105668.
  75. Yin, L., Zhu, X., Su, Z., & Guo, H. (2025). Is disagreement beneficial for market efficiency? Evidence from ESG ratings. Journal of International Money and Finance, 154, 103322.
  76. Zhang, C., Yang, C., & Liu, C. (2021). Economic policy uncertainty and corporate risk-taking: Loss aversion or opportunity expectations. Pacific-Basin Finance Journal, 69, 101640.
  77. Zhang, G., Han, J., Pan, Z., & Huang, H. (2015). Economic policy uncertainty and capital structure choice: Evidence from China. Economic Systems, 39(3), 439-457.
  78. Zomorodian, G., Shaban Zadeh, M., & Najafi Shariatzadeh, I. (2015). The impact of monetary and fiscal policy uncertainty on the Iranian capital market. Financial Engineering and Securities Management, 25, 81–106 (In Persian).

Files

Share

How to cite

Statistics