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Investor Sentiment: Too Contagious to Ignore?

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  • Amar Soebhag

Abstract

This article empirically investigates the role of investor sentiment as a determinant of financial contagion during crises periods. The focus is on developed equity markets as well as emerging equity markets during 1990-2015. By using a multivariate GARCH methodology, cross-equity market correlations are documented to be substantially increasing during financial crises. Investor sentiment is negatively related to cross-equity market correlation. This inverse relationship becomes even stronger during times of financial crises, indicating the existence of financial contagion. This finding can be motivated by loss-averse and ambiguity-averse investors in equity markets. The relationship between investor sentiment and cross-equity market correlation persists after controlling for trade linkages, financial linkages, and other macroeconomic similarities between countries. The findings are robust to changes in crises definition.

Suggested Citation

  • Amar Soebhag, 2018. "Investor Sentiment: Too Contagious to Ignore?," Applied Finance and Accounting, Redfame publishing, vol. 4(1), pages 54-72, February.
    • Handle: RePEc:rfa:afajnl:v:4:y:2018:i:1:p:54-72
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    More about this item

    Keywords

    contagion; financial crises; investor sentiment; multivariate GARCH;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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