International connectedness of equity markets and the crude oil market: the case of Iran, Pakistan, and Turkey

The evolution of connectedness between international equity and commodity markets across time can be measured building on forecast error variance decomposition in a vector autoregression (VAR) framework. This approach permits the assessment of directional spillovers across markets on a day-to-day basis, which can be cast in a daily spillover matrix. Broadening the scope of this concept, we study the markets' constitution and interaction in terms of information propagation values and entropies adopting a Markov chain perspective. Our findings can be summarized as follows. There is a trend towards higher connectedness among Western equity markets, starting in the 1990s. In the case of Russia and Turkey, a discernible trend has begun around 2005; however, there is a sign of substantial connectedness neither in the case of Iran nor Pakistan. Although the overall impact level of Iran and Pakistan is very low, we can identify short periods of time when KSE or TEPIX had a potentially high impact on international markets. Crude oil markets showed almost no connection with equity markets before 2007, which has been changing since then. Comparing Turkey on the one hand and Iran and Pakistan on the other, one conclusion is that the latter economies are more or less secluded and using their international potential yet.