Global, Local, and Contagious Investor Sentiment
47 Pages Posted: 8 Jun 2009 Last revised: 11 Mar 2012
Date Written: October 17, 2011
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
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