Global, Local, and Contagious Investor Sentiment

Abstract:     
We construct investor sentiment indices for six major stock markets and decompose them into one global and six local indices. In a validation test, we find that relative sentiment is correlated with the relative prices of dual-listed companies. Global sentiment is a contrarian predictor of country-level returns. Both global and local sentiment are contrarian predictors of the time series of cross-sectional returns within markets: When sentiment is high, future returns are low on relatively difficult to arbitrage and difficult to value stocks. Private capital flows appear to be one mechanism by which sentiment spreads across markets and forms global sentiment.

Number of Pages in PDF File: 47

Keywords: Sentiment, Return predictability

JEL Classification: G11, G12, G14, G15, G17

Accepted Paper Series