Born in the USA? Contagious investor sentiment and UK equity returns

Yawen Hudson and Christopher Green
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Yawen Hudson: Lord Ashcroft International Business School, Anglia Ruskin University

Discussion Paper Series from Department of Economics, Loughborough University

Abstract: We construct new sentiment indices for UK investors and UK institutional investors based on commonly-cited indicators using the first principle component method. We find that there is one-way Granger-causality from US or German sentiment on the one hand to UK sentiment indices on the other. We examine if the sentiment measures can help explain UK equity returns, distinguishing between 'crisis' and 'tranquil' periods. Sentiment helps explain returns except at crisis times, supporting the thesis that in a crisis, prices tend to revert to fundamental values. We also find that when US and UK sentiment are used in the same regressions to explain UK stock returns, US sentiment variables are highly significant whereas UK sentiment variables are not significant at all, suggesting that UK sentiment is 'born in the USA'.

Keywords: Investor sentiment; contagion; institutional investors; equity returns (search for similar items in EconPapers)
JEL-codes: G12 G14 G2 (search for similar items in EconPapers)
Date: 2013-11, Revised 2013-11
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Citations: View citations in EconPapers (2)

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