Local and Global Sentiment Effects, and the Role of Legal, Trading and Information Environments

Abstract:     
Using domestic consumer confidence indicators to proxy investor sentiment and data from 23 different equity markets, we document a pervasive overall sentiment effect. We further document a significant effect of global sentiment across these markets. More accessible markets have stronger global sentiment effects, suggesting that capital flows help the spread of sentiment across borders. For locally sourced sentiment, the core finding is of a stronger sentiment effect in a poorer environment. On the other hand, for globally sourced sentiment the opposite result is strongly evidenced, namely, that a stronger sentiment effect tends to be linked to a stronger environment. Broadly speaking, a better domestic legal and information environment is associated with weaker local and stronger global sentiment effects. Our findings suggest that, the effect of a good environment on facilitating arbitrage activity is stronger than its effect on attracting local behavioral investors but weaker than its effect in attracting foreign behavioral investors. Our results also suggest that a good legal environment rather than low transaction costs is the primary concern when behavioral investors seek foreign investment opportunities.

Number of Pages in PDF File: 50

Keywords: Local Sentiment, Global Sentiment, Contagion, Legal Environment, Trading Environment, Information Environment

JEL Classification: G15, G14

working papers series