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Global, local, and contagious investor sentiment

  • Baker, Malcolm
  • Wurgler, Jeffrey
  • Yuan, Yu

We construct indexes of investor sentiment for six major stock markets and decompose them into one global and six local indexes. Relative market sentiment is correlated with the relative prices of dual-listed companies, validating the indexes. Both global and local sentiment are contrarian predictors of the time series of major markets' returns. They are also contrarian predictors of the time series of cross-sectional returns within major markets: When sentiment from either global or local sources is high, future returns are low on various categories of difficult to arbitrage and difficult to value stocks. Sentiment appears to be contagious across markets based on tests involving capital flows, and this presumably contributes to the global component of sentiment.

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File URL: http://dallasfed.org/assets/documents/institute/wpapers/2009/0037.pdf
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Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 37.

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Length: 39 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:fip:feddgw:37
Note: Published as: Baker, Malcolm, Jeffrey Wurgler and Yu Yuan (2012), "Global, Local, and Contagious Investor Sentiment," Journal of Financial Economics 104 (2): 272-287.
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