Investor Sentiment: Too Contagious to Ignore?
Applied Finance and Accounting, 2018, vol. 4, issue 1, 54-72
This article empirically investigates the role of investor sentiment as a determinant of financial contagion during crises periods. The focus is on developed equity markets as well as emerging equity markets during 1990-2015. By using a multivariate GARCH methodology, cross-equity market correlations are documented to be substantially increasing during financial crises. Investor sentiment is negatively related to cross-equity market correlation. This inverse relationship becomes even stronger during times of financial crises, indicating the existence of financial contagion. This finding can be motivated by loss-averse and ambiguity-averse investors in equity markets. The relationship between investor sentiment and cross-equity market correlation persists after controlling for trade linkages, financial linkages, and other macroeconomic similarities between countries. The findings are robust to changes in crises definition.
Keywords: contagion; financial crises; investor sentiment; multivariate GARCH (search for similar items in EconPapers)
JEL-codes: R00 Z0 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:rfa:afajnl:v:4:y:2018:i:1:p:54-72
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