Control Variables

3.4.3 Control Variables

This study include various control variables in the regression model. Control variables are other elements that would affect the macroeconomic environment as well as the investors’ sentiment. These variables would affect investors’ behavior, and hence impacting the market volatility. Macroeconomic factors such as unemployment rate, consumer confidence index, inflation rate and index of industrial production in Taiwan are used as the control variables of the study and their impact on VIXTWN will be considered.

Fleming et al. (1995) concluded that there is a strong short-term relationship between changes in VIX and S&P 100 returns. S&P 100 returns depreciate when the fluctuation in VIX is high. Fernandes et al. (2014) introduced a negative relationship between VIX and S&P 500 returns. From previous scholar’s research result, we know that there is a strong relationship between market volatility and stock market return.

The TAIEX index is a capitalization-weighted index of all listed common shares traded on the Taiwan Stock Exchange daily, it can be used as a measure of Taiwanese common stock returns. The historical data of TAIEX is extracted from the TEJ Database and the variable TAIEX is used in our study.

Savor and Wilson (2011) suggested that macroeconomic new announcement would affect the overall future stock return. Unemployment rate and inflation rate are used in Savor and Wilson’s (2011) research to assess the impact of macroeconomic news announcement on the equity market and the result supported the hypothesis. In this study, UE is used to denote the monthly unemployment rate in Taiwan. Unemployment rate is the share of labor force that is jobless and it measure the portion of idle labor that a country has. Unemployment rate is calculated monthly by the government and is announced by the Executive Yuan, on the 23^rd of every month. Unemployment rate can reflect consumers’ will in consuming and the general public level of pessimism on future economy. The monthly unemployment rate in Taiwan is extracted from the TEJ database.

Savor and Wilson (2011) used the inflation rate as one of the variables considering the relationship between macroeconomic news announcement and stock return. The monthly inflation rate in Taiwan is represented by the variable INFL. Inflation rate is the rate at which the general level of prices for goods and services rise, and it indicates the rate of change of Consumer Price Index (CPI). The inflation rate is calculated as 𝐼𝑁𝐹𝐿 = ^{𝐶𝑃𝐼𝑡− 𝐶𝑃𝐼𝑡−1}

𝐶𝑃𝐼𝑡−1 . The purchasing power of a particular currency decrease when

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its inflation rate increase, investor will tend to invest less when inflation rate is high, thus inflation rate affect financial market volatility. Historical information about changes in CPI can be found in the macroeconomic database of TEJ.

Goodell and Vähämaa (2013) used Consumer Confidence Index (CCI) as one of the variables in examining market volatility and the changes in CCI is correlated with change in VIX. The variable CCI is used to denote the monthly Consumer Confidence Index in Taiwan. CCI represent the degree of optimism on the state of economy that consumers are expressing through their activities of savings and spending. CCI shows consumers' perceptions of current business and employment condition, and their expectations for business, employment, and income in the coming six months. The value of CCI lies between 0 and 200. The index above 100 points indicates optimism (positive responses) and index below 100 points indicate pessimism. Historical value of CCI can be found in the TEJ database.

Baba and Sakurai (2011) used various macroeconomic variables to investigate regime-switch in VIX, and index of industrial production (IIP) is one of the variables used. Empirical result suggested the interaction between VIX and IIP is significant. IIP measures the output of industrial establishments in various sectors. The government of the R.O.C. has defined five sectors (mining and quarrying, manufacturing, electricity and gas, water supply and construction sectors) as the major industrial sectors of Taiwan.

The monthly index of industrial production is denoted as IIP and its historical data is found in the TEJ database.

Recent values of VIX would also affect investors’ confident level on the financial market. Investors would consider market volatility and the level of uncertainty when they make investment decision, VIX can reflect market volatility. The variable PRIOR_VIX is used to control the effect of prior VIXTWN on future volatility.

PRIOR_VIX is the average amount of VIXTWN in the past ninety days. The historical data of VIX can be extracted from the TEJ database.

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Table 3-4 Description of Variables

Variables Descriptions Sources

VIXTWN The daily closing VIX provided by the Taiwan Future

Exchange (TAIFEX). TEJ

INQWt

The weighted average number of local industrial news

article collected daily by using keyword-search. CMoney IPt

The weighted average optimistic mood of local

industrial news article daily. CMoney

INt

The weighted average pessimistic mood of local

industrial news article daily. CMoney

ITONEt

The weighted average daily news tone of local industrial

market news. CMoney

SNQWt

The average number of global major stock market news

article collected daily by using keyword-search. CMoney SPt

The average optimistic mood of global major stock

market news article daily. CMoney

SNt

The average pessimistic mood of global major stock

market news article daily. CMoney

STONEt

The average daily news tone of global major stock

market news. CMoney

TAIEX The daily capitalization-weighted index of all listed

common shares traded on the Taiwan Stock Exchange. TEJ

UE The monthly unemployment rate of Taiwan. TEJ

INFL The monthly inflation rate of Taiwan. TEJ CCI The monthly value of consumer confidence index of

Taiwan. TEJ

IIP The monthly index of industrial production in Taiwan. TEJ PRIOR_VIX The average amount of VIXTWN in the past 90 days. TEJ

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