IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/88561.html
   My bibliography  Save this paper

Evidence of Investor Sentiment Contagion across Asset Markets

Author

Listed:
  • Pan, Wei-Fong

Abstract

This study explores investor sentiment contagion across asset markets and relates specific asset market sentiments to other asset markets. The analysis reveals four main findings. First, investor sentiment highly correlates between equity markets. Second, investor sentiment in one asset market can affect those in other markets; for example, sentiments in the bond markets, particularly the US bond market, significantly Granger cause equity market sentiment, but not vice versa. Investor sentiments in the USD–JPY exchange market can Granger cause those in the Euro–USD, gold, and crude oil markets. Third, investor sentiments in the US asset markets have the largest contagion effects on asset markets given the resultant fluctuations in sentiments across other countries. Fourth, US asset market sentiments, especially bond market sentiment, can explain returns in other asset markets in different countries.

Suggested Citation

  • Pan, Wei-Fong, 2018. "Evidence of Investor Sentiment Contagion across Asset Markets," MPRA Paper 88561, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:88561
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/88561/1/MPRA_paper_88561.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. David Hirshleifer & Tyler Shumway, 2003. "Good Day Sunshine: Stock Returns and the Weather," Journal of Finance, American Finance Association, vol. 58(3), pages 1009-1032, June.
    2. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    3. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    4. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
    5. Neal, Robert & Wheatley, Simon M., 1998. "Adverse selection and bid-ask spreads: Evidence from closed-end funds," Journal of Financial Markets, Elsevier, vol. 1(1), pages 121-149, April.
    6. Haiqiang Chen & Terence Tai-Leung Chong & Xin Duan, 2010. "A principal-component approach to measuring investor sentiment," Quantitative Finance, Taylor & Francis Journals, vol. 10(4), pages 339-347.
    7. Swaminathan, Bhaskaran, 1996. "Time-Varying Expected Small Firm Returns and Closed-End Fund Discounts," The Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 845-887.
    8. Terence Tai-Leung Chong, Bingqing Cao, Wing Keung Wong, 2017. "A Principal Component Approach to Measuring Investor Sentiment in Hong Kong," Journal of Management Sciences, Geist Science, Iqra University, Faculty of Business Administration, vol. 4(2), pages 237-247, October.
    9. Maria Ward Otoo, 1999. "Consumer sentiment and the stock market," Finance and Economics Discussion Series 1999-60, Board of Governors of the Federal Reserve System (U.S.).
    10. Jansen, W. Jos & Nahuis, Niek J., 2003. "The stock market and consumer confidence: European evidence," Economics Letters, Elsevier, vol. 79(1), pages 89-98, April.
    11. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    12. Henkel, Sam James & Martin, J. Spencer & Nardari, Federico, 2011. "Time-varying short-horizon predictability," Journal of Financial Economics, Elsevier, vol. 99(3), pages 560-580, March.
    13. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2010. "Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy," The Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 821-862, February.
    14. Hudson, Yawen & Green, Christopher J., 2015. "Is investor sentiment contagious? International sentiment and UK equity returns," Journal of Behavioral and Experimental Finance, Elsevier, vol. 5(C), pages 46-59.
    15. Michael Lemmon & Evgenia Portniaguina, 2006. "Consumer Confidence and Asset Prices: Some Empirical Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1499-1529.
    16. Dashan Huang & Fuwei Jiang & Jun Tu & Guofu Zhou, 2015. "Investor Sentiment Aligned: A Powerful Predictor of Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 791-837.
    17. Saunders, Edward M, Jr, 1993. "Stock Prices and Wall Street Weather," American Economic Review, American Economic Association, vol. 83(5), pages 1337-1345, December.
    18. Schmeling, Maik, 2009. "Investor sentiment and stock returns: Some international evidence," Journal of Empirical Finance, Elsevier, vol. 16(3), pages 394-408, June.
    19. Baker, Malcolm & Wurgler, Jeffrey & Yuan, Yu, 2012. "Global, local, and contagious investor sentiment," Journal of Financial Economics, Elsevier, vol. 104(2), pages 272-287.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zaremba, Adam & Long, Huaigang & Karathanasopoulos, Andreas, 2019. "Short-term momentum (almost) everywhere," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 63(C).
    2. Fabian Moodley & Sune Ferreira-Schenk & Kago Matlhaku, 2024. "Effect of Market-Wide Investor Sentiment on South African Government Bond Indices of Varying Maturities under Changing Market Conditions," Economies, MDPI, vol. 12(10), pages 1-22, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tiwari, Aviral Kumar & Abakah, Emmanuel Joel Aikins & Bonsu, Christiana Osei & Karikari, Nana Kwasi & Hammoudeh, Shawkat, 2022. "The effects of public sentiments and feelings on stock market behavior: Evidence from Australia," Journal of Economic Behavior & Organization, Elsevier, vol. 193(C), pages 443-472.
    2. Papapostolou, Nikos C. & Pouliasis, Panos K. & Nomikos, Nikos K. & Kyriakou, Ioannis, 2016. "Shipping investor sentiment and international stock return predictability," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 96(C), pages 81-94.
    3. Pedro Manuel Nogueira Reis & Carlos Pinho, 2021. "A Reappraisal of the Causal Relationship between Sentiment Proxies and Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 22(4), pages 420-442, October.
    4. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2013. "Investor sentiment effect in stock markets: Stock characteristics or country-specific factors?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 572-591.
    5. Zaremba, Adam & Szyszka, Adam & Long, Huaigang & Zawadka, Dariusz, 2020. "Business sentiment and the cross-section of global equity returns," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    6. Kim Kaivanto & Peng Zhang, 2019. "Investor Sentiment as a Predictor of Market Returns," Working Papers 268005798, Lancaster University Management School, Economics Department.
    7. Wang, Wenzhao & Duxbury, Darren, 2021. "Institutional investor sentiment and the mean-variance relationship: Global evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 415-441.
    8. Kostopoulos, Dimitrios & Meyer, Steffen, 2018. "Disentangling investor sentiment: Mood and household attitudes towards the economy," Journal of Economic Behavior & Organization, Elsevier, vol. 155(C), pages 28-78.
    9. Salhin, Ahmed & Sherif, Mohamed & Jones, Edward, 2016. "Managerial sentiment, consumer confidence and sector returns," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 24-38.
    10. Mehwish Aziz Khan & Eatzaz Ahmad, 2018. "Measurement of Investor Sentiment and Its Bi-Directional Contemporaneous and Lead–Lag Relationship with Returns: Evidence from Pakistan," Sustainability, MDPI, vol. 11(1), pages 1-20, December.
    11. Siganos, Antonios & Vagenas-Nanos, Evangelos & Verwijmeren, Patrick, 2014. "Facebook's daily sentiment and international stock markets," Journal of Economic Behavior & Organization, Elsevier, vol. 107(PB), pages 730-743.
    12. Corredor, Pilar & Ferrer, Elena & Santamaria, Rafael, 2014. "Is cognitive bias really present in analyst forecasts? The role of investor sentiment," International Business Review, Elsevier, vol. 23(4), pages 824-837.
    13. Niall O’Sullivan & Sheng Zhu & Jason Foran, 2019. "Sentiment versus liquidity pricing effects in the cross-section of UK stock returns," Journal of Asset Management, Palgrave Macmillan, vol. 20(4), pages 317-329, July.
    14. Ung, Sze Nie & Gebka, Bartosz & Anderson, Robert D.J., 2023. "Is sentiment the solution to the risk–return puzzle? A (cautionary) note," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).
    15. Yuan Li, 2022. "Mood Beta, Sentiment and Stock Returns in China," SAGE Open, , vol. 12(1), pages 21582440221, February.
    16. Wenjie Ding & Khelifa Mazouz & Qingwei Wang, 2019. "Investor sentiment and the cross-section of stock returns: new theory and evidence," Review of Quantitative Finance and Accounting, Springer, vol. 53(2), pages 493-525, August.
    17. Anand, Abhinav & Basu, Sankarshan & Pathak, Jalaj & Thampy, Ashok, 2021. "The impact of sentiment on emerging stock markets," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 161-177.
    18. Ahmed Salhin & Mo Sherif & Edward Jones, 2016. "Investor Sentiment and Sector Returns," CFI Discussion Papers 1602, Centre for Finance and Investment, Heriot Watt University.
    19. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2019. "Firm-specific investor sentiment and daily stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 50(C).
    20. Wang, Wenzhao & Su, Chen & Duxbury, Darren, 2022. "The conditional impact of investor sentiment in global stock markets: A two-channel examination," Journal of Banking & Finance, Elsevier, vol. 138(C).

    More about this item

    Keywords

    investor sentiment; contagion; asset return;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:88561. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.