International Research Journal of Finance and Economics ISSN 1450-2887 Issue 48 (2010) EuroJournals Publishing, Inc. 2010 http://www.eurojournals.com/finance.

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Consumer Confidence and Financial Market Variables in an Emerging Market: The Case of Turkey
Hurit Gne Marmara University, Faculty of Economics and Administrative Sciences Department of Economics, Gztepe Campus, Kadky, Istanbul, 34722, Turkey E-mail: hursit@marmara.edu.tr Tel: +90 216 346 43 56; Fax: +90 216 346 43 56 Sadullah elik Marmara University, Faculty of Economics and Administrative Sciences Department of Economics, Gztepe Campus, Kadky, Istanbul, 34722, Turkey E-mail: scelik@marmara.edu.tr Tel: +90 216 346 43 56; Fax: +90 216 346 43 56 Abstract The motivation of this study is to bring together two strands of empirical research for an emerging market during the pre-crisis period; the literature on consumer sentiment and the literature on financial market variables. We propose that in emerging markets the households live close to the level of subsistence and hardly have any funds for saving purposes. Hence, they believe that the future is uncertain rather than risky. In such economies, response of households to survey questions should depend on past information and current economic outlook rather than the expectations of future paths of consumption (and growth). So, consumer sentiment should be modeled with high frequency financial market variables such as interest rates, exchange rates and the stock exchange index. We utilize this relationship for the emerging economy of Turkey. Employing weekly data for the period of January 2003 January 2008, this study empirically shows the existence of cointegration between consumer confidence and the financial market variables of interest. Therefore, we believe that this is a significant insight for emerging markets where consumer confidence could be viewed as an endogenous variable sensitive to financial market variables rather than the future outlook of the economy.

Keywords: Consumer Confidence, Emerging Market, Financial Market Variables, Cointegration. JEL Classification Codes: C22, C32, E27, E37.

1. Introduction
The theoretical and empirical aspects of consumer sentiment surveys have been one of the key research topics in recent decades. There exists a vast amount of literature on consumer confidence analyzing its information content for both developed and emerging economies (See Curtin 2004 for an excellent survey). However, there is hardly any consensus on the usefulness of sentiment as an economic variable.

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The analysis of consumer confidence derives from the distinct literature of psychological economics. It is widely accepted that the perceptions and expectations of households dominate the response process during the survey of questions which aim to extract information from the past and current standing as well as future behavior. The studies by Katona (1960 and 1968) are usually the most often cited describing the fundamentals of this literature. As one of the main tendency measures, consumer sentiment is credited as possessing additional information on the future path of the economy. An increase in confidence should lead to a rise in consumption expenditures with a certain lag. As income is not capable of reflecting all the changes in consumption, consumer confidence offers help as a leading indicator composed of tools to measure both the ability and willingness to buy that individuals possess alongside other significant economic and financial variables. This study attributes consumer confidence the role of an endogenous variable while assessing the dynamic relationship between the consumer confidence and the financial markets for the case of Turkey. We employ weekly data obtained from the CNBC-e Consumer Confidence index survey and the stock exchange market, foreign exchange rate market and bill/bond interest rates. Our special emphasis is on the checking the existence of a long-run relationship for these high frequency variables of interest. Given a favorable finding would be valuable in accurate future predictions of consumer confidence and also the path of domestic demand. The second section includes a brief literature survey on consumer confidence. Section three outlines the basics of the CNBC-e Consumer Confidence Index in Turkey. Section four is twofold with empirical methodology and results. In conclusion, we advocate the usefulness of consumer sentiment for future studies.

2. Previous Research
The first step for the use of surveys to measure consumer spending was taken by George Katona and his associates in the University of Michigan in the 1950s. Katona (1951) argues that especially at turning points, since consumer behavior may be unpredictable, survey measures of consumer sentiment could contribute importantly to both forecasts of consumer spending and an understanding of consumer behavior. It is possible to separate the literature on consumer confidence into three distinct approaches. The first argues that there is a significant and strong link between consumer sentiment and consumption expenditures (Carroll et al. 1994). The second fails to find any supportive evidence of empirical significance, rejecting the validity of consumer confidence as a leading indicator (Garner, 1991). Finally, the third uses some form of unconventional methodology to bridge the gap between qualitative survey data and quantitative analysis, resulting in favorable (Jansen and Nahuis, 2003) and non-favorable evidence (Dominitz and Manski, 2004). However, the common point of all these studies is to focus on the explanatory power of consumer confidence, thus restricting it to the role of an exogenous variable. The first approach uses time series models to estimate the predictive ability of consumer confidence on household spending (Acemoglu and Scott, 1994; Matsusaka and Sbordone, 1995; Bram and Ludvigson, 1998; Hfner and Schrder, 2002; Ludvigson, 2004; Kwan and Cotsomitis, 2006). The predictive capability of ICS is dependent on life-cycle hypothesis meaning that consumers decisions are affected by their expectations of their future income. The second approach advocates that the link between consumer expectations and changes in future consumer sales activity is rather weak (Van den Abeele, 1983; Fuhrer, 1993; Ludvigson, 1996). These studies follow similar methods as the first group, but reach contradictory empirical findings. The third approach employs some form of unconventional method like analyzing the forecast errors regarding the consumer confidence index, the possible relationship between the Blue Chip economic indicators and the consumer sentiment, or micro-level expectations data in an Euler-equation framework (Flavin, 1991; Huth et al. 1994; Alessie and Lusardi, 1997; Batchelor and Dua, 1998;

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Souleles, 2001; Eppright et al. 2003, Jansen and Nahuis, 2004). Some of these studies provide support for the consumer confidence index. Among others, Jansen and Nahuis (2003) studying the relationship between stock market developments and consumer confidence in 11 European countries over 19862001, conclude that stock returns cause consumer sentiment at very short horizons of 2 weeks to 1 month. Moreover, they find that the relationship between stock market and consumer sentiment depends on the expectations about economy-wide conditions rather than the conventional wealth effect. On the other hand, Dominitz and Manski (2004) display the higher volatility regarding business condition questions than the ones regarding personal financial situation. Furthermore, Van Oest and Franses (2008) offer a new methodology which analyzes the information content for consumer confidence by estimating unobserved shifts between negative, neutral and positive opinions for the same set of survey respondents. They argue that a claim about changes in consumer confidence is rather a strong statement. This study also employs some unconventional methodology by assessing the determinants of consumer confidence in an emerging economy so that the functional identity of consumer confidence is revealed. This is important for three reasons: first, a favorable finding will mean that in emerging markets consumers behave different due to the dynamic economic structure; second, consumer confidence measures in emerging markets will be considered with care (rather than just some data); and last, we will have more insight into the psychological framework of consumers in emerging markets where there is certainly a difference between ability to buy and willingness to buy (Roos, 2008).

3. CNBC-e Consumer Confidence Index

There are two consumer confidence indices that are announced on a monthly basis in Turkey, the CNBC-e Consumer Confidence Index and the TCMB TU K (CBRT - TURKSTAT) Consumer Confidence Index. The correlation between these indices is very high, reaching to about 90 percent and statistically significant. Nevertheless, we use CNBC-e Consumer Confidence Index as we have data of weekly frequency available from the survey provider. 3.1. Methodology of CNBC-e Consumer Confidence Index (CCI) The methodology of CCI has simply been adopted from the Michigan University index of consumer sentiment.1 However, the base period is January 2002 with a value of 100. The index could fluctuate between 0 and 200. The sample used to collect the survey data is chosen from a database containing about 15,000,000 individuals maintained by the survey provider. The index has started with about 800 surveys but by July 2002 the survey provider has fixed the number of at 704.2 The survey data is obtained from the respondents between the 27th day of the previous month and the 26th day of the current month for which the index is calculated. There are seven predetermined criteria for the respondents which are always met through the use of advanced software while the survey is held: 1) 70 percent comes from Istanbul, Ankara and Izmir while 30 percent comes from other cities and big districts in Turkey. 2) 60 percent is between 36-55 years of age and 40 percent is between 18-35 years of age. 3) The number of males and female is equal. 4) 50 percent of the total surveys are composed of new respondents each month. 5) At least 30 percent of new records are from individuals who had been successfully surveyed in the previous month.
1

Consumer confidence in the Unites States has been measured nationally by two sources, the University of Michigan and the Conference Board. Both indices are based on five questions that have remained unchanged since their inception. There are two questions to measure attitudes about current conditions, and three questions that ask respondents about their future expectations. See Bram and Ludvigson (1998) and Garner (2002) for further details. Recently, this number has increased to 720 for technical reasons.

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6) A maximum 20 percent of total completed surveys may be composed of additional respondents and these respondents are not called again in the next month. 7) Respondents are not surveyed more than two times so that the biases in the answers of respondents are minimized. CCI is composed of the following questions and the possible answer choices: 1) We would like to learn your current economic situation. Can you compare your (and your familys) current financial situation with last year? Better Worse Same No Idea 2) What do you think your (and your familys) future financial situation will be in a year? Better Worse Same No Idea 3) Can you compare your current expectations about Turkish economy with the previous month? Better Worse Same No Idea 4) What do you think Turkish economys situation will be in a year? Better Worse Same No Idea 5) Do you think that the current period is a good time to buy durable consumer goods such as TV, refrigerator and furniture or vehicles or residence? Good Time Bad Time Same The index is calculated according to following formula: Index Value = (Current period value / Base period value) *100 Current periods value for each question is being calculated as = ((Number of optimistic answers for the question Number of pessimistic answers for the question) / 720)*100) + 100 The current period values of each question are summed up to obtain current periods value for the overall index and then compared to the base value so that the current periods index is obtained. The index is announced at 09:00 on the first day of every month-or the next business day if it falls on a weekend or holiday-on CNBC-e television channel.

4. Methodology of the Study

This section is composed of two parts: First, a short summary explaining the methodology of the empirical analysis and then the presentation of empirical with brief assessment. 4.1. Unit Roots, Cointegration, Vector Error Correction Models and Impulse Response Functions 4.1.1. Unit Roots Although macroeconomists are interested in stationary time series, they often encounter non-stationary time series, the classical example being the random walk model. In this context, testing the presence of unit roots is crucial not only to see whether the time series revert back to some long run mean after a shock or display random walk behavior. There are two types of random walks, one of which is the random walk without drift (i.e., no constant or intercept term) and the other of which is the random walk with drift (i.e., a constant term is present). In the former, the mean value of the series is equal to its initial value which is constant, but as t increases, its variance increases indefinitely. An interesting feature of a random walk model is the persistence of random shocks. As for the latter, the mean as well as the variance increases over time, violating the conditions of (weak) stationarity. This paper employs two unit root tests, namely the Augmented Dickey-Fuller test (ADF) of Dickey and Fuller (1979; 1981) and Said and Dickey (1984) and the KPSS test developed by Kwiatkowski et al. (1992).

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4.1.2. Cointegration The term cointegration, which was introduced by Granger (1981) and more fully developed by Engle and Granger (1987) means that one or more linear combinations of these variables is stationary even though individually they are not. A lack of cointegration suggests that such variables have no long-run link. Johansen (1988) and Johansen and Juselius (1990), in their seminal papers, estimate cointegrating relationships in a system of equations framework to take advantage of all the information available in the long-run and short-run fluctuations of each variable. In this sense, it is possible to test more than one cointegrating vector in the data and to calculate the maximum-likelihood estimates of these vectors. In the Johansen method, there are two test statistics for the number of cointegrating vectors; namely trace and maximum eigenvalue test statistics. In the trace test, the null is that the number of cointegrating vector is less than or equal to 1, 2, and so forth. For instance, if the null which is r = 0 can not be rejected, it is required to stop at this point which means that there is no cointegrating vector. If it is rejected, it is necessary to proceed until the point that the null hypothesis is accepted. As for the the maximum eigenvalue test, this test is similar except that the alternative hypothesis is explicit. The null hypothesis r = 0 tests against the alternative that r = 1; r = 1 is tested against the r = 2, etc. 4.1.3. Vector Error Correction Model (VECM) Macroeconomic theory often suggests that some set of variables can not wander far away from each other. If individual time series are integrated of order one, I (1), however they may be cointegrated. Therefore, cointegration explains the case in which a set of non-stationary series may exhibit a long run link even though the components of this set individually contain stochastic trends. In order to eliminate the spurious regression problem, it might be necessary to define a dynamic model in first differences: y t = 0 + 0 x t + 1 x t 1 + 1 y t 1 + ut (1) Since the above model lacks the long-run information and is incapable of forecasting the future periods, error correction model should be formalized for the dynamic model so as to allow the model to incorporate both short run and long run effects. 4.1.4. Impulse Response Functions (IRF) Impulse response functions convey the effects of a shock to one endogenous variable to other variables in VAR. If the correlation among the shocks t are small, then the impulse responses could be simply interpreted stating that the ith innovation only affects the ith endogenous variables. However, if the correlations among such shocks are strong, then a transformation to the shocks is employed in order to make the shocks uncorrelated. 4.2 Empirical Findings The empirical analysis includes the conventional unit root tests, cointegration analysis and the normalized coefficient estimates from cointegration, and finally the VECM analysis and impulse response functions. The consumer confidence variable3 (CCI) is the CNBC-e consumer confidence index obtained from CNBC-e Consumer Confidence Index Survey Provider. For the stock exchange index obtained from the ISE website (http://www.imkb.gov.tr), three alternative variables are used as the stanbul Stock Exchange 100 Index (ISE100), stanbul Stock Exchange Financial (ISEFIN) Index, and stanbul Stock Exchange Technology (ISETECH) Index. There are also two variables employed for the exchange rate obtained from CBRT website (http://www.tcmb.gov.tr); one is the calculated average of
3

The CCI values are calculated daily with reference to the starting base value of January 2002. The daily values for the starting days of the new survey for each month (Between 26th and the end of the month) is set equal to the announced value of the previous month so that a large number of survey responses will be gathered that can be used to calculate the new months daily values when the new month actually starts on the 1st.

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(1 dollar + 1 euro) exchange rates (BASKET), and the other is the dollar exchange rate (DOLLAR). Finally, the interest rate variable is the simple annual interest rate (INTSIM) for the bond/bill with the highest volume in the bond market for the corresponding period. The data covers the period between the first week of January 2003 and the last week of January 20084. All variables except INTSIM are expressed in their natural logarithms. 4.2.1. Unit Root Test Results
Table 1: ADF Unit Root Tests5
Level with constant ADF -2.534 -1.063 -1.182 -1.763 -2.714 -2.337 -2.947* Level with trend ADF -2.797 -2.434 -1.719 -2.630 -2.755 -2.703 -2.091 Difference with constant ADF -12.536** -14.060** -14.123** -17.970** -11.390** -11.756** -7.942** Difference with trend ADF -12.516** -14.059** -14.133** -17.938** -11.368** -11.732** -8.252**

ADF UNIT ROOT TESTS VARIABLE CCI ISE100 ISEFIN ISETECH BASKET DOLLAR INTSIM

In Table 1, we display the ADF unit root tests for levels and differences with constant, and constant and trend cases. We fail to reject the null of unit root at 5 % significance level in terms of level with constant and level with trend, whereas the results for all the variables in differences lead us to reject the null of unit root at 5 % significance level regardless of the case considered.
Table 2: KPSS Unit Root Tests6
Level with constant KPSS 0.607* 1.998** 1.974** 1.491** 0.144 0.665* 1.238** Level with trend KPSS 0.221** 0.302** 0.340** 0.204* 0.098 0.133 0.401** Difference with constant KPSS 0.040 0.073 0.105 0.058 0.054 0.071 0.473* Difference with trend KPSS 0.030 0.036 0.042 0.054 0.053 0.071 0.089

KPSS UNIT ROOT TESTS VARIABLE CCI ISE100 ISEFIN ISETECH BASKET DOLLAR INTSIM

As for the other unit root test which is illustrated in Table 2, the level of the variable BASKET is stationary for the case with constant, whereas it is nonstationary for the case with trend. In general, all our variables in question could be classified as nonstationary, having a unit root.

The original computerized daily data for CCI starts in July 2002. However, due to the highly volatile economic and political environment in Turkey during July-December 2002, we prefer starting the analysis at the beginning of the year 2003. The critical values for the case with Constant are-3.455, -2.872 and -2.573 for 1 %, 5%, and 10% significance levels, and for the case with Trend are -3.994, -3.427 and -3.137 for 1%, 5%, and 10% significance levels, respectively. (*) denotes significance at 5 % level, and (**) denotes significance at 1 % level. The lag selection is done using the Schwarz Information Criteria with the maximum lag length set to 4. The critical values for the case with constant are 0.739, 0.463, 0.347 for 1%, 5% and 10% significance levels, and for the case with Trend are 0.216, 0.146 and 0.119 for 1%, 5% and 10% significance levels, respectively. (*) denotes significance at 5 % level, and (**) denotes significance at 1 % level. The KPSS test is computed using the Bartlett kernel to account for the potential correlation of the residuals with a bandwidth automatically selected using the Newey-West Bandwidth.

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4.2.2. Cointegration Test Results

Table 3: Johansen-Juselius Cointegration Tests7
Constant Max Eigenvalue 37.056* 18.638 13.399 8.844 38.246* 19.245 14.692 8.414 38.979* 19.169 13.418 8.895 40.332* 18.661 14.837 8.411 33.000* 20.313 12.937 7.184 34.754* 20.095 11.462 5.139 Trend Max Eigenvalue 34.531* 21.086 13.106 12.394 36.063* 20.423 16.152 12.258 36.404* 20.546 13.353 12.039 38.097* 19.339 16.549 12.253 42.313* 18.181 15.096 9.546 44.169* 18.289 14.428 11.300

VARIABLE CCI ISE100 BASKET INTSIM CCI ISE100 DOLLAR INTSIM CCI ISEFIN BASKET INTSIM CCI ISEFIN DOLLAR INTSIM CCI ISETECH BASKET INTSIM CCI ISETECH DOLLAR INTSIM

Null r =0 r1 r2 r3 r =0 r1 r2 r3 r =0 r1 r2 r3 r =0 r1 r2 r3 r =0 r1 r2 r3 r =0 r1 r2 r3

Trace 77.937* 40.881* 22.243* 8.844 80.597* 42.351* 23.106* 8.414 80.460* 41.481* 22.313* 8.895 82.239* 41.908* 23.247* 8.411 73.432* 40.432* 20.120 7.184 71.450* 36.696* 16.601 5.139

Trace 81.117* 46.586* 25.500 12.394 84.896* 48.833* 28.410* 12.258 82.342* 45.938* 25.393 12.039 86.237* 48.142* 28.803* 12.253 85.136* 42.822 24.642 9.546 88.187* 44.017* 25.728 11.300

In order to check whether the individual non-stationary series are cointegrated, we employ Johansen-Juselius cointegration test, which is illustrated in Table 3. In all cases, one cointegrating vector is obtained showing the long-run co-movement of the variables of interest. After detecting the existence of long run link between the relevant variables, we analyze the coefficient estimates of the cointegration relationship to derive inferences from the long-run relationship. The normalized cointegrating coefficients from Johansen-Juselius estimation are demonstrated in Table 4.
Table 4: Normalized Cointegrating Coefficients from Johansen-Juselius Estimation8
NORMALIZED VARIABLE: CCI ISETECH BASKET DOLLAR 0.0190 (0.316) 0.0570 (0.314) -0.4252 (0.253) -0.4696 (0.240)

ISE100 -0.2810 (0.057) -0.0117 (0.194) -0.3237 (0.048) -0.1794 (0.158)

7

ISEFIN

INTSIM -0.6138 (0.110) -0.5607 (0.129) -0.5888 (0.096) -0.5259 (0.113)

TREND ---0.0004 (0.0005) ---0.0004 (0.0004)

The 5 % critical values for the Maximal Eigenvalue test are 28.59, 22.30, 15.89, and 9.16 for the Constant case, and 32.11, 25.82, 19.38, and 12.51 for the Trend case. The 5 % critical values for the Trace test are 54.08, 35.19, 20.26, and 9.16 for the Constant case and, 63.88, 42.91, 25.87, and 12.52 for the Trend case. (*) denotes significance at 5 % level. The values in brackets under the coefficient estimates are the standard errors.

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-0.2692 (0.045) -0.2676 (0.137) -0.2975 (0.040) -0.2473 (0.120) -0.4332 (0.111) -0.2734 (0.073) -0.4400 (0.124) -0.2439 (0.067) -0.0491 (0.281) -0.0918 (0.275) -0.3630 (0.233) -0.4170 (0.228) 0.2232 (0.407) -0.3680 (0.223) 0.6595 (0.428) -0.4280 (0.195) -0.6573 (0.104) -0.6731 (0.122) -0.6403 (0.094) -0.6127 (0.115) -0.5493 (0.120) -0.5660 (0.065) -0.6967 (0.139) -0.5440 (0.066)

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---0.00005 (0.0004) ---0.0002 (0.0003) ---0.0005 (0.0001) ---0.0006 (0.0001)

The results could be summarized as follows: a) We obtain the controversial result of the analysis as the negative and significant coefficients for alternative stock exchange index variables. There could be several reasons for such a relationship: First, between the years, 2003 - 2007, the share of foreign investors in stanbul stock exchange has increased significantly. Hence, a 1 % increase in stock exchange leads to a decrease in consumer sentiment measured using domestic households ranging between 0.272 - 0.597 %. We believe that this is the first study to show such adverse reaction of private households in an emerging market. b) Negative and statistically significant coefficients which vary between 0.78 and 1.10 for alternative exchange rate variables support our a priori expectation that the Turkish households naturally lose confidence as their purchasing power declines. c) The sign of the interest rate variable is negative and the coefficient of the interest rate is statistically significant for all the specifications considered. The rising cost of capital, the tightness in the credit market, and the liquidity concerns mean that the confidence of individuals decrease as interest rates surge up. Therefore, survey respondents have negative reactions to the upward movements in interest rates as we observe a rise in consumption credits during the expansionary monetary policy period of 2003-2007. 4.2.3. VECM Results
Table 5:
CCIt R = 0.24 ISE100t R = 0.03 BASKETt R = 0.13 INTSIMt R =0.08 CCIt R = 0.24 ISE100t R = 0.03 DOLLARt R = 0.12 INTSIMt R = 0.07
9 10

Vector Error Correction Models9

Constant -0.001 [-0.97] 0.003* [2.62] -0.0001 [-0.33] -0.001 [-1.38] -0.001 [-1.16] 0.003* [ 2.65] -0.0003 [-0.75] -0.001 [-1.32] SEt 0.024 [ 0.33] 0.183* [ 2.28] -0.069* [-2.21] -0.150* [-2.39] 0.045 [ 0.61] 0.190* [ 2.39] -0.081* [-2.43] -0.159* [-2.57] -0.117 [-1.60] -0.058 [-0.73] 0.007 [ 0.22] -0.049 [-0.79] -0.111 [-1.53] -0.064 [-0.82] -0.0003 [-0.01] -0.054 [-0.88] EXCt -0.555 -0.251 [-3.03] [-1.36] 0.221 -0.030 [ 1.11] [-0.15] 0.255* 0.0516 [ 3.33] [0.67] -0.008 0.0589 [-0.05] [0.38] -0.456* -0.254 [-2.64] [-1.47] 0.248 -0.084 [ 1.33] [-0.45] 0.227* 0.0267 [ 2.91] [0.34] -0.068 0.0569 [-0.47] 0.39] INTt -0.152* -0.332* [-1.75] [-3.83] -0.0145 0.0175 [-0.15] [0.20] -0.012 -0.038 [-0.34] [-1.05] -0.101 0.03656 [-1.39] [0.50] -0.128 -0.310* [-1.45] [-3.53] -0.031 0.0226 [-0.32] [0.24] -0.023 -0.039 [-0.58] [-0.99] -0.086 0.042 [-1.16] [ 0.56] CCIt 0.163* [ 2.63] 0.010 [ 0.15] 0.008 [0.30] -0.053 [-1.01] 0.175* [ 2.83] 0.003 [ 0.04] 0.005 [0.17] -0.052 [-0.99] -0.035 [-0.58] -0.028 [-0.43] -0.023 [-0.91] -0.032 [-0.65] -0.024 [-0.40] -0.028 [-0.43] -0.028 [-1.04] -0.032 [-0.63] ECT10 -0.069* [-3.55] 0.009 [ 0.42] 0.004 [ 0.54] -0.029* [-1.80] -0.088* [-3.98] 0.010 [ 0.43] -0.004 [-0.37] -0.0305 [-1.63]

The values in brackets under the coefficient estimates are the t-ratios. (*) denotes significance at 5 % levels. ECT denotes Error Correction Terms.

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CCIt R = 0.24 ISEFINt R = 0.03 BASKETt R = 0.13 INTSIMt R = 0.06 CCIt R = 0.25 ISEFINt R = 0.03 DOLLARt R = 0.11 INTSIMt R = 0.06 CCIt R = 0.24 ISETECHt R = 0.03 BASKETt R = 0.14 INTSIMt R = 0.05 CCIt R = 0.23 ISETECHt R = 0.03 DOLLARt R = 0.13 INTSIMt R = 0.05 -0.001 [-1.02] 0.003* [2.55] -0.0002 [-0.42] -0.001 [-1.51] -0.001 [-1.19] 0.0029* [ 2.57] -0.0003 [-0.83] -0.0011 [-1.44] -0.001 [-1.10] 0.0004 [ 0.26] -0.0003 [-0.72] -0.001* [-1.92] -0.001 [-1.26] 0.0003 [ 0.22] -0.001 [-1.17] -0.001* [-1.90]

International Research Journal of Finance and Economics - Issue 48 (2010)

0.034 [ 0.53] 0.166* [2.08] -0.049* [-1.84] -0.093* [-1.71] 0.051 [ 0.81] 0.174* [ 2.19] -0.058* [-2.03] -0.102* [-1.89] 0.010 [ 0.25] -0.162* [-2.25] -0.028* [-1.67] -0.061 [-1.74] 0.0091 [ 0.22] -0.151* [-2.11] -0.041* [-2.22] -0.059* [-1.73] -0.086 [-1.38] -0.056 [-0.71] 0.0059 [ 0.22] -0.034 [-0.64] -0.082 [-1.32] -0.059 [-0.76] 0.001 [0.03] -0.038 [-0.72] 0.038 [ 0.95] -0.049 [-0.68] -0.010 [-0.59] -0.042 [-1.22] 0.0297 [ 0.74] -0.054 [-0.76] -0.006 [-0.35] -0.039 [-1.14] -0.529* [-2.93] 0.248 [1.09] 0.270* [ 3.55] 0.047 [ 0.30] -0.435* [-2.55] 0.283 [1.32] 0.243* [ 3.12] -0.02 [-0.14] -0.494* [-2.89] -0.243 [-0.80] 0.281* [ 3.92] 0.069 [ 0.47] -0.430* [-2.64] 0.005 [ 0.02] 0.256* [ 3.47] 0.023 [ 0.16] -0.238 [-1.30] -0.038 [-0.16] 0.045 [ 0.58] 0.048 [ 0.31] -0.242 [-1.41] -0.083 [-0.38] 0.022 [ 0.28] 0.049 [ 0.34] -0.055 [-0.32] 0.163 [ 0.54] 0.003 [ 0.04] 0.008 [ 0.05] -0.108 [-0.67] -0.041 [-0.14] 0.006 [ 0.08] 0.031 [ 0.22] -0.137 [-1.59] -0.040 [-0.37] -0.009 [-0.24] -0.080 [-1.08] -0.112 [-1.27] -0.060 [-0.54] -0.019 [-0.46] -0.068 [-0.90] -0.133 [-1.59] -0.194 [-1.30] 0.002 [ 0.05] -0.058 [-0.81] -0.140 [-1.61] -0.237 [-1.54] -0.007 [-0.17] -0.049 [-0.67] -0.323* [-3.74] 0.024 [ 0.22] -0.038 [-1.04] 0.045 [ 0.62] -0.299* [-3.42] 0.027 [0.25] -0.038 [-0.96] 0.0495 [ 0.66] -0.268* [-3.21] -0.035 [-0.24] -0.037 [-1.06] 0.062 [ 0.86] -0.274* [-3.17] -0.020 [-0.13] -0.031 [-0.80] 0.058 [ 0.79] 0.167* [ 2.70] 0.023 [ 0.29] 0.006 [ 0.23] -0.057 [-1.08] 0.179* [ 2.91] 0.016 [ 0.21] 0.002 [ 0.08] -0.057 [-1.08] 0.171* [ 2.78] -0.031 [-0.28] -0.001 [-0.04] -0.076 [-1.44] 0.169* [ 2.74] -0.050 [-0.46] -0.005 [-0.17] -0.072 [-1.38] -0.023 [-0.50] -0.029 [-0.39] -0.022 [-0.89] -0.031 [-0.63] -0.019 [-0.32] -0.03 [-0.38] -0.028 [-1.02] -0.032 [-0.63] -0.034 [-0.58] -0.007 [-0.07] -0.029 [-1.16] -0.056 [-1.11] -0.038 [-0.64] -0.013 [-0.13] -0.038 [-1.40] -0.050 [-0.99] -0.08* [-3.83] 0.015 [ 0.58] 0.006 [ 0.70] -0.026 [-1.44] -0.102* [-4.28] 0.016 [ 0.53] -0.002 [-0.14] -0.025 [-1.22] -0.083* [-4.11] -0.028 [-0.78] 0.020* [ 2.34] 0.015 [ 0.86] -0.074* [-4.03] -0.021 [-0.64] 0.016* [ 1.96] 0.003 [ 0.22]

The error correction terms defining the speed of adjustment of the long run equilibrium of the variables of interest are generally negative and significant at 5 % giving a very clear insight into the adjustment process for all series11. A value of CCI and INTSIM above its long-run equilibrium in one period will produce upward pressure on the variables in the subsequent period. 4.2.4. IRF
Figure 1: CCI ISE100 BASKET INTSIM

Response to Cholesky One S.D. Innovations

Response of CCI to ISE100
.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

11

They are not significant for alternative specifications of the stock exchange index and the exchange rate.

International Research Journal of Finance and Economics - Issue 48 (2010)

Response of CCI to BASKET
.008

176

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to INTSIM

.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Figure 2: CCI ISE100 DOLLAR INTSIM

Response to Cholesky One S.D. Innovations
Response of CCI to ISE100
.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to DOLLAR

.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

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Response of CCI to INTSIM
.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Figure 3: CCI ISEFIN BASKET INTSIM

Response to Cholesky One S.D. Innovations
Response of CCI to ISEFIN
.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to BASKET

.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to INTSIM

.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

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Figure 4: CCI ISEFIN DOLLAR INTSIM
Response to Cholesky One S.D. Innovations
Response of CCI to ISEFIN
.008

178

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to DOLLAR

.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to INTSIM

.008

.004

.000

-.004

-.008 2 4 6 8 10 12 14 16 18 20

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Figure 5: CCI ISETECH BASKET INTSIM

Response to Cholesky One S.D. Innovations

Response of CCI to ISETECH
.004 .002 .000 -.002 -.004 -.006 -.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to BASKET

.004 .002 .000 -.002 -.004 -.006 -.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to INTSIM

.004 .002 .000 -.002 -.004 -.006 -.008 2 4 6 8 10 12 14 16 18 20

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Figure 6: CCI ISETECH DOLLAR INTSIM

180

Response to Cholesky One S.D. Innovations

Response of CCI to ISETECH
.004 .002 .000 -.002 -.004 -.006 -.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to DOLLAR

.004 .002 .000 -.002 -.004 -.006 -.008 2 4 6 8 10 12 14 16 18 20

Response of CCI to INTSIM

.004 .002 .000 -.002 -.004 -.006 -.008 2 4 6 8 10 12 14 16 18 20

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In order to further evaluate the nature and determinants of CCI, we use impulse response functions where stock exchange index, exchange rate, and interest rate are the impulses and the consumer confidence is the response. The impulse response graphics for each equation (Figures 1-6) show the response of consumer confidence index to a one unit shock in the exogenous variables. The results are in accordance with our a priori expectations depending on economic theory. While there is a positive response to ISE100, ISEFIN, and ISETECH, there is a negative response to BASKET, DOLLAR and INTSIM. When we compare the magnitudes of the effect of the exogenous variables on CCI, we observe that CCI gives a response to interest rate much more than it does to the stock exchange index. Hence, we believe that these results are evidence for the information content that the consumer confidence index possesses.

5. Conclusion
In this study, we have reversed the question of interest in the consumer sentiment literature by examining the determinants of consumer confidence rather than its information content for the emerging market of Turkey. Our aim has been to demonstrate the dynamic interaction between the economy and the response of economic agents to consumer sentiment surveys. Given that Turkey is still classified as a small open economy with future development potential, a priori one should believe that consumer confidence should hardly be related to any economic, financial or behavioral variable. However, our empirical findings display the exact opposite as they point to the endogenous nature of consumer confidence. The question What determines consumer confidence? is answered by the explanatory powers of financial variables like the exchange rate and the stock exchange index and the rate of interest. Thus, consumer confidence could be employed as an endogenous economic variable for emerging markets. This special characteristic is in line with major developed economies. Furthermore, consumer confidence in Turkey shows the dynamic expectation formation of households which hardly have resources to save. Overall, we believe that CNBC-e consumer confidence index in Turkey is a rather new but very functional economic data set. We detect its strong relationship with significant financial variables in a high frequency data set. Therefore, we advocate our support for the consumer sentiment in emerging markets for further studies with special emphasis on the mechanism of how households form expectations using the available information on economic and financial variables and expectations.

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