The power of investor sentiment in explaining bank stock performance: Listed conventional vs. Islamic banks

We argue that the different features of the Islamic banking model, as being a relatively young industry with recent rapid growth, might influence the magnitude of investor sentiment impact on its market returns differently from its conventional counterparts. Using Google-search-query-based investor sentiment and turnover measures and market data over the period 2006–2017, we find that Islamic banks are more sensitive to fluctuations in investor sentiment than their conventional counterparts located in the same country for Bahrain, Egypt, Malaysia, Kuwait, Jordan, Pakistan, Qatar, Saudi Arabia, Turkey, and UAE. Furthermore, our evidence suggests that the effect of investor sentiment on both conventional and Islamic banks is, to some extent, asymmetric. Specifically, the mood of optimistic investors imposes a stronger effect on bank stock performance in the dual-banking industry. Our results suggest that investors' herding behavior might contribute to the contagion from U.S. banking to Islamic banking.