Designing a Financial Volatility Index (FVI): approach to machine learning models in uncertainty

ABSTRACT

The purpose of this study is to design a financial stress index to predict the occurrence of financial crisis in the Tehran Stock Exchange. In this paper, a composite index has been designed to measure the Iranian financial system and the effects of financial volatility in conditions of uncertainty in the financial markets and the Tehran Stock Exchange between 2008 and 2020. Volatility Index of currency, stock exchange and banking industry are the three main components in the design of this model. Since in the previous research, the shock of variables was used. In this research, while using the volatility of these variables, a comprehensive index regarding the volatility of currency, stock exchange and banking industry has been considered. This research is conducted in five steps based on the GHARCH-DCC approach and finally, based on the variables of financial institutions, a predictive model for the financial stress index is presented. From the results, we find that all the independent variables of the research have a significant effect on the financial stress index, except for the volatility of the coin market, which has a negative effect; the other independent variables have a positive effect on the financial stress index.   

KEYWORDS:

• Financial volatility
• machine learning model
• stress test

JEL classification:

• A11
• B16
• B41
• C02

Acknowledgements

We have our thanks and appreciation from the Iran Stock Exchange Organization.

Disclosure statement

This article comparatively analyzes stock exchange companies. There is no conflict of interest between colleagues in this article.

Authors’ contributions

All authors have an equal share in this article.

Additional information

Funding

No funding has been received from any organization.

Notes on contributors

Reza Ghaffari Gol Afshani

Reza Ghaffari Gol Afshani, is currently the CEO of one of the largest liquefied gas companies in Iran. He is also a financial advisor and professor at Qom University.

Mir Feiz FallahShams

Mir Feiz FallahShams, is currently a university professor and has a background in financial activities as a consultant for large organizations in Iran. He has published numerous scientific articles in the field of money and finance.

Mojgan Safa

Mojgan Safa, is currently a university professor and has a background in financial activities as a consultant for large organizations in Iran. He has published numerous scientific articles in the field of money and finance.

Hossein Jahangirnia

Hossein Jahangirnia, is currently a university professor and has a background in financial activities as a consultant for large organizations in Iran. He has published numerous scientific articles in the field of money and finance.