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Are crises sentimental?

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  • Tao Chen
  • Erin P. K. So
  • Isabel K. M. Yan

Abstract

This paper examines the role of investor sentiment in signalling the onset of equity crises in a panel of over 50 countries. We find that although poor economic fundamentals are significant determinants of the vulnerability of countries, a shift from bullish to bearish investor sentiment acts as the final trigger. Bearish investor sentiment in regional and local markets exhibits significant predictive power for the outbreak of equity crises in the subsequent one to eight quarters, beyond that forecasted by pure economic fundamentals. The results remain broadly unchanged even after we orthogonalize the sentiment indices to information about economic fundamentals.

Suggested Citation

  • Tao Chen & Erin P. K. So & Isabel K. M. Yan, 2021. "Are crises sentimental?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 962-985, January.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:1:p:962-985
    DOI: 10.1002/ijfe.1830
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