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Stock-level sentiment contagion and the cross-section of stock returns

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  • Zhou, Liyun
  • Chen, Dongqiao
  • Huang, Jialiang

Abstract

As investor sentiment can be cross-sectionally heterogeneous and contagious across different assets, stock-level investor sentiment may also be contagious among different stocks. This study provides empirical evidence on the patterns of stock-level sentiment contagion among different stocks and its roles on the cross-section of stock returns in the Chinese Stock Markets. Firstly, we found significant stock-level sentiment contagion effects by capturing the contagion patterns of investors’ psychological and heterogeneous beliefs across different stocks and industries. Secondly, stock-level sentiment contagion has a systematic and positive impact on the cross-section of daily stock returns. Thirdly, stock-level sentiment contagion effects are stronger for stock portfolios with small size, high volatility, growth, young and low fixed asset ratios. Furthermore, the quality of firm-specific information and the strength of economic policy uncertainty have different effects on stock-level sentiment contagion. Collectively, this study provides direct evidence for the cross-section of stock returns from the perspective of sentiment contagion.

Suggested Citation

  • Zhou, Liyun & Chen, Dongqiao & Huang, Jialiang, 2023. "Stock-level sentiment contagion and the cross-section of stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s106294082300089x
    DOI: 10.1016/j.najef.2023.101966
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