Investor Sentiment and Stock Market Crashes: A Heliobiological Perspective

Abstract

This paper investigates the impact of solar activities on market crashes based on the literature concerning solar activities and investor sentiment. Our analysis reveals a significant and inverse relation between solar activities and the frequency as well as severity of market crashes. The relation remains robust when considering the interaction with macroeconomic variables, alternative metrics for market crashes, and various durations of solar activities. We further find that lower solar activities contribute to increased market illiquidity and volatility as well as a higher incidence and severity of market crashes during highly uncertain periods. Utilizing structural equation modeling (SEM) and incorporating traditional sentiment indices as mediator variables, we find that solar activity exerts significant direct effects on the intensity and density of market crashes. Furthermore, the relation between solar activities and market crashes applies to not only the U.S. stock market but also other developed and emerging stock markets.

Keywords: Investor sentiment, Market crashes, Heliobiological, Solar activities, SEM