Determination of the Sensitivity of Stock Index to Macroeconomic and Psychological Factors by MARS Method

Abstract

Purpose: Investors and portfolio managers can earn profitably when they correctly predict when stock prices will go up or down. For this reason, it is crucial to know the effect levels of the factors that affect stock prices. In addition to macroeconomic factors, the psychological behavior of investors also affects stock prices. Therefore, the study aims to reveal the different sensitivity levels of the stock index against macroeconomic and psychological factors.

Design/Methodology/Approach: In this study, dollar rate (USD), euro rate (EURO), time deposit interest rate (IR), gold price (GOLD), industrial production index (IPI), and consumer price index (CPI) (inflation (INF)) were used as macroeconomic factors, while Consumer Confidence Index (CCI) and VIX Fear Index (VIX) were used as psychological factors. In addition, the BIST-100 index, which is listed in Borsa Istanbul, was used as the stock index. The sensitivity of the stock index to macroeconomic and psychological factors was investigated using the Multivariate Adaptive Regression Spline (MARS) method using data from January 2012 to October 2020.

Findings: In the analyses performed using the MARS method, the coefficients of INF, USD, EURO, IR, CCI, and VIX Index were found to be statistically significant and effective on the stock index. Among these variables, INF has the highest effect on stocks. It is followed by USD, IR, EURO, CCI, and VIX. GOLD and IPI variables did not show statistical significance in the model. The most important difference of the MARS model from other regressions is that each factor’s effect on the stock index is analyzed by separating it according to the value of the factor. According to the results obtained from the MARS model: (1) it has been determined that USD, EURO, IR, and CPI have both positive and negative effects on the stock market index and (2) CCI and VIX have been found to have negative effects on stocks. These results provide essential information about how investors who plan to invest in the stock index should take into consideration different macroeconomic and psychological values.

Originality/value: This study contributes to the literature as it is one of the first studies to examine the effects of factors affecting the stock index by decomposing it according to the values it takes. Also, this study provides additional information by listing the factors affecting the stock index in order of importance. These results will help investors, portfolio managers, company executives, and policy-makers understand the stock markets.

Citation

Yıldız, M. and Özdemir, L. (2022), "Determination of the Sensitivity of Stock Index to Macroeconomic and Psychological Factors by MARS Method", Grima, S., Özen, E. and Gonzi, R.E.D. (Ed.) Insurance and Risk Management for Disruptions in Social, Economic and Environmental Systems: Decision and Control Allocations within New Domains of Risk (Emerald Studies in Finance, Insurance, and Risk Management), Emerald Publishing Limited, Leeds, pp. 81-105. https://doi.org/10.1108/978-1-80117-139-720211005