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The Role of Consumer Confidence as a Leading Indicator on Stock Returns: A Markov Switching Approach

Koy Ayben and Murat Akkaya
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Koy Ayben: Istanbul Commerce University, Istanbul, Turkey

Economics and Applied Informatics, 2017, issue 1, 36-47

Abstract: Investor’s psychological and emotional factors lead to irrationality in financial decision making and anomalies in prices. Investor sentiment and psychology help to elucidate phenomena in financial markets that cannot be explained by traditional theory. The aim of this study is two-fold: it investigates whether mutual regime switching behavior exists between the consumer indices and equity index, and examines their dynamics in response to each other in different regimes. This study applies the Markov Regime Switching model to monthly data from the BIST100 Return Index, Bloomberg Confidence Index, TUIK Confidence Index, Real Sector Confidence Index for the period between 2007:01 and 2016:06. The results indicate if consumer indices point out negative signals, capital market still gains in normal periods of economy. If they only in a recession or an expansion regime do, each of the indices moves in the same direction.

Keywords: Behavioral Finance; Consumer Confidence; Stock Returns; Markov Regime Switching; Nonlinearity (search for similar items in EconPapers)
Date: 2017
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