The current research aims to answer the question as to by which channels the oil shock is transmitted to the stock market and how it spreads in the stock market. In this regard, the Factor-Augmented VAR approach, and also the global price index of commodity groups, macroeconomic variables, indices of large listed industries, and the total index of the Tehran Stock Exchange (for the period 2004-2016) have been used. Hence, the action-reaction functions are extracted in order to study the transmission mechanism of the oil price shock and its propagation in the stock market of Iran as an oil-exporting country. The findings show the impact of the oil shock on the stock market through three channels: (a) direct channels (b) global commodity price channels and (c) macroeconomic channels. Furthermore, based on the effects of the oil shock, the way of reaction from these channels is different. Accordingly, in the process of spreading the oil price shock in the stock market, the index of the group of petroleum products, chemical products, basic metals, metal ore extraction, multidisciplinary industrial, banking, and cement sectors, and consequently the total stock market index, increases significantly and steadily.
