Global, Local, and Contagious Investor Sentiment

47 Pages Posted: 23 Mar 2009 Last revised: 11 Mar 2012

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Yu Yuan

Shanghai Advanced Institute of Finance; University of Pennsylvania - Wharton Financial Institutions Center

Multiple version iconThere are 2 versions of this paper

Date Written: October 17, 2010

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.

Keywords: Sentiment, Return predictability

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

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey and Yuan, Yu, Global, Local, and Contagious Investor Sentiment (October 17, 2010). Journal of Financial Economics (JFE), Vol. 104, pp 272-287, May 2012; AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1364911

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey A. Wurgler

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yu Yuan (Contact Author)

Shanghai Advanced Institute of Finance ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

HOME PAGE: http://www.saif.sjtu.edu.cn/facultylist/yyuan/

University of Pennsylvania - Wharton Financial Institutions Center

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

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