Investor Sentiment Connectedness: Evidence From Linear And Nonlinear Causality Approaches

This paper provides a novel perspective in determining the Granger causality of sentiment across the US, Latin America, Eurozone, Japan and Asia (excluding Japan), based on monthly data covering the period of January 2003–November 2017. Using a survey-based sentiment index of “sentix†, our results suggest strong evidence of nonlinearity and structural breaks making the use of linear causality models unreliable. Using a kernel-based multivariate nonlinear causality test, we find that causality runs from Eurozone to the US, Asia and Japan, with Japan also causing the Eurozone sentiment, and Latin America causing the Japanese sentiment. Interestingly, when we apply rolling estimations to detect time-varying causality for the cases of Eurozone and the US, Eurozone and Asia, Eurozone and Japan and Latin America and Japan, the results suggest evidence of bidirectional spillovers during certain months of the recent global financial crisis, and thereafter. Overall, our findings indicate that the sentiments of Japan, Asia and the US are related quite strongly with that of the Eurozone, as well as the sentiments of Japan and Latin America.