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  • May 2012
  • Article
  • Journal of Financial Economics

Global, Local, and Contagious Investor Sentiment

By: Malcolm Baker, Jeffrey Wurgler and Yu Yuan
  • Format:Print
  • | Pages:16
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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

Business and Shareholder Relations; Globalization; Stocks; Markets; Capital; Financial Services Industry

Citation

Baker, Malcolm, Jeffrey Wurgler, and Yu Yuan. "Global, Local, and Contagious Investor Sentiment." Journal of Financial Economics 104, no. 2 (May 2012): 272–287.
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About The Author

Malcolm P. Baker

Finance
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