Excess Stock Return Comovements and the Role of Investor Sentiment
25 Pages Posted: 8 Jul 2011 Last revised: 19 Aug 2012
Date Written: July 7, 2011
This paper investigates whether investor sentiment can explain stock return comovements. Our findings demonstrate that since the 1960s, there has been a clear and rapid increase in correlations between international equity markets. Decomposing the equity returns into fundamental and non-fundamental components reveals that the increased correlation is driven by the non-fundamental part. We find that stock return comovements are mainly driven by investor sentiment, which explains the level, variance, and covariance of the non-fundamental component of returns.
Keywords: Behavioral Finance, Excess Comovement; Investor Sentiment; International Equity Markets
JEL Classification: C32, G15
Suggested Citation: Suggested Citation