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Born in the USA? Contagious investor sentiment and UK equity returns

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  • Yawen Hudson

    (Lord Ashcroft International Business School, Anglia Ruskin University)

  • Christopher J. Green

    (School of Business and Economics, Loughborough University)

Abstract

We construct new sentiment indices for UK investors and UK institutional investors based on commonly-cited indicators using the first principle component method. We find that there is one-way Granger-causality from US or German sentiment on the one hand to UK sentiment indices on the other. We examine if the sentiment measures can help explain UK equity returns, distinguishing between 'crisis' and 'tranquil' periods. Sentiment helps explain returns except at crisis times, supporting the thesis that in a crisis, prices tend to revert to fundamental values. We also find that when US and UK sentiment are used in the same regressions to explain UK stock returns, US sentiment variables are highly significant whereas UK sentiment variables are not significant at all, suggesting that UK sentiment is 'born in the USA'.

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File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Hudson_Green_wp_2013_13.pdf
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Bibliographic Info

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2013_13.

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Date of creation: Nov 2013
Date of revision: Nov 2013
Handle: RePEc:lbo:lbowps:2013_13

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Keywords: Investor sentiment; contagion; institutional investors; equity returns;

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