Investor Sentiment and Multi-Scale Positive and Negative Stock Market Bubbles in a Panel of G7 Countries

Renee van Eyden (), Rangan Gupta, Joshua Nielsen () and Elie Bouri ()
Additional contact information
Joshua Nielsen: Boulder Investment Technologies, LLC, 1942 Broadway Suite 314C, Boulder, CO, 80302, USA
Elie Bouri: School of Business, Lebanese American University, Beirut, Lebanon

No 202256, Working Papers from University of Pretoria, Department of Economics

Abstract: In this paper, firstly, we use the Log-Periodic Power Law Singularity Multi-Scale Confidence Indicator (LPPLS-CI) approach to detect both positive and negative bubbles in the short-, medium- and long-term of the stock market indices of the G7 countries. After detecting major crashes and booms in the seven stock markets over the monthly period of 1973:02 to 2020:09, we observe similar timing of strong (positive and negative) LPPLS-CIs across the G7 countries, suggesting synchronized extreme movements in these stock markets. Given this, secondly, we apply heterogeneous coefficients panel data-based regressions to analyze the impact of investor sentiment, proxied by business and consumer confidence indicators, on the indicators of bubbles of the G7. After controlling for the impacts of output growth, inflation, monetary policy, stock market volatility, and growth in trading volumes, we find that investor sentiment increases the positive and reduces the negative LPPLS-CIs, primarily at the medium- and long-term scales for the G7 considered all together, with the result being driven by at least five of the seven countries. Our results have important implications for both investors and policymakers, as the collapse (improvement) of investor sentiment can lead to a crash (recovery) in a bull (bear) market.

Keywords: Multi-Scale Bubbles and Crashes; Investor Sentiment; Business and consumer confidence; Panel Regressions; G7 Stock Markets (search for similar items in EconPapers)
JEL-codes: C22 C32 G41 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2022-11
New Economics Papers: this item is included in nep-fmk
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Journal Article: Investor sentiment and multi-scale positive and negative stock market bubbles in a panel of G7 countries (2023)
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