Relationship between Stock Returns and Consumer Confidence Index: An Evaluation from Diagonal VECH Model

There is a strong consensus among the economists that there is a strong relationship between the returns of stocks which are among the most important instruments of financial markets and the market confidence of consumers. However, the relationship between the two variables which is the variable from which the variable is explained in different ways in both theory and empirical writing. In this study, we examined the relationship between the stocks and the consumer confidence index in Turkey by employing a diagonal VECH model which allows to capture the variance-covariance matrices. The findings obtained from the data covering 2002:M12-2018:M12, there is a spillover effect from the consumer confidence index to Istanbul Stock Exchange BIST-100 Index in Turkey. In addition to this finding which obtained from the average equation, it is determined that there is a spillover effect between the uncertainty series obtained from the error terms of both models. These findings suggest that the consumer confidence index can be used in the modelling of the stock prices in Turkey