Crude Oil Price Hikes and Exchange Rate Volatility in Iran: Evidence from GARCH-family Models

Mahmoudi, Vahid; Arabi, Hossein

doi:10.22050/pbr.2025.530147.1398

Crude Oil Price Hikes and Exchange Rate Volatility in Iran: Evidence from GARCH-family Models

Document Type : Original Article

Authors

Vahid Mahmoudi ¹

Hossein Arabi ²

¹ Professor, Department of Financial Management and Insurance, Faculty of Management, University of Tehran, Tehran, Iran.

² Ph.D. Candidate, Supreme National Defense University, Tehran, Iran.

https://doi.org/10.22050/pbr.2025.530147.1398

Abstract

This study investigates the impact of global crude oil price fluctuations on the volatility of the Iranian Rial–U.S. Dollar exchange rate over the period November 2011 to August 2025. Using daily data and employing GARCH-family models—including GARCH(1,1), EGARCH(1,1), and GJR-GARCH(1,1,1) under heavy-tailed distributions—we examine whether oil price shocks influence the mean and conditional variance of exchange rate returns. The results indicate that higher oil prices significantly appreciate the Rial, reflecting Iran’s dependence on oil revenues and foreign exchange inflows. Volatility dynamics reveal strong persistence, with shocks exhibiting long memory. Asymmetric effects are also evident: negative oil price shocks increase exchange rate volatility more than positive shocks, highlighting the destabilizing role of downturns in global oil markets. Diagnostic tests confirm the adequacy of the estimated models, with EGARCH and GJR specifications providing the best fit. The findings underscore three key policy implications. First, Iran’s exchange rate remains highly sensitive to oil revenues, reinforcing the need for structural diversification. Second, the persistence of volatility complicates short-term stabilization, demanding long-term reserve and fiscal policies. Third, the asymmetric impact of oil downturns calls for proactive risk management to mitigate volatility in times of declining oil prices. Overall, the study provides new evidence on the oil–exchange rate nexus in an oil-exporting economy, offering lessons for macroeconomic management under external shocks. Robustness checks — including Bai–Perron breakpoint tests and alternative model specifications with event dummies — confirm the main findings.

Highlights

Introduces bifurcation as a procedural tool to streamline complex arbitral proceedings by separating preliminary issues from merits

· Compares tribunal practices under ICSID, UNCITRAL, and ICC regimes on bifurcation, citing real-world procedural orders and awards

· Emphasizes three legal thresholds for bifurcation: seriousness of the objection, separability from merits, and potential to resolve or narrow the case

· Enhances procedural efficiency and fairness by showcasing how early rulings on jurisdiction or applicable law reduce time, costs, and evidentiary burdens

Keywords

Crude Oil Prices

Exchange Rate Volatility

GARCH Models

Asymmetric Effects

Volatility Clustering

Subjects

Oil and Gas Economics and Management

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