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On the persistence of market sentiment: A multifractal fluctuation analysis

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  • Schadner, Wolfgang

Abstract

This paper applies multifractal detrended fluctuation analysis to study the multifractal property and temporal persistence of U.S. and European stock market sentiment, providing deeper insights into investor behavior. The findings indicate that the average sentiment is anti-persistent, understood as a general tendency for investors to overreact. The multifractal spectrum has a significant width in both markets, which comes with a substantial variation in local sentiment persistence. Analyses show that the current sentiment persistence is positively related to the level of market mood. Hence, investor fear is related to overreacting, while optimism is more closely to a random walk. This result is of potential interest for investment strategies, but is also likely to affect the stability of a financial market. Conclusions are drawn from financial option and survey data.

Suggested Citation

  • Schadner, Wolfgang, 2021. "On the persistence of market sentiment: A multifractal fluctuation analysis," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 581(C).
  • Handle: RePEc:eee:phsmap:v:581:y:2021:i:c:s037843712100515x
    DOI: 10.1016/j.physa.2021.126242
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