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Exploring the causal links between investor sentiment and financial instability: A dynamic macro-financial analysis

Author

Listed:
  • Brahim Gaies

    (IPAG Business School)

  • Mohamed Sahbi Nakhli
  • Rim Ayadi

    (COACTIS - COnception de l'ACTIon en Situation - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne)

  • Jean-Michel Sahut

    (IDRAC Business school Lyon - Institut pour le Développement et la Recherche d'Action Commerciale - Université de Lyon)

Abstract

Investor sentiment may not only influence financial instability, it may also be shaped by it. Moreover, such causal links may differ over time, in crisis and non-crisis periods. This is a groundbreaking paper that tests these two hypotheses from a macro-financial perspective using the bootstrap rolling window sub-sample Granger causality approach to look at the case of the U.S. financial market between January 1990 and January 2021. We find that bullish sentiment can reduce financial instability as it promotes financial market entry and then liquidity during non-crisis periods, while higher financial instability is associated with less bullish sentiment leading to a shift to crisis periods. The results also reveal a positive (negative) effect of bearish (bullish) investor sentiment on financial instability during crisis periods, including the 2007–2008 financial crisis, the 2010 flash crash, the 2015–2016 Chinese stock market turbulence, and the February 2020 stock market crash. Finally, the study highlights the important role of the “betting against beta” strategy in the U.S. financial market, showing a negative effect of financial instability on bearish investor sentiment during several pre- and post-crisis periods.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Brahim Gaies & Mohamed Sahbi Nakhli & Rim Ayadi & Jean-Michel Sahut, 2022. "Exploring the causal links between investor sentiment and financial instability: A dynamic macro-financial analysis," Post-Print hal-04760654, HAL.
    • Handle: RePEc:hal:journl:hal-04760654
    DOI: 10.1016/j.jebo.2022.10.013
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    Cited by:

    1. Dammak, Wael & Frikha, Wajdi & Souissi, Mohamed Naceur, 2024. "Market turbulence and investor decision-making in currency option market," The Journal of Economic Asymmetries, Elsevier, vol. 30(C).
    2. repec:ehl:wpaper:127154 is not listed on IDEAS
    3. Nguyen, Huan Huu & Ngo, Vu Minh & Pham, Luan Minh & Van Nguyen, Phuc, 2025. "Investor sentiment and market returns: A multi-horizon analysis," Research in International Business and Finance, Elsevier, vol. 74(C).
    4. Fang, Guobin & Zhou, Xuehua & Ma, Huimin & Zhao, XiaoFang & Deng, YaoXun & Xie, Luoyan, 2025. "Economic policy uncertainty, investor sentiment and systemic financial risk: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 76(C).
    5. Nakhli, Mohamed Sahbi & Gaies, Brahim & Hemrit, Wael & Sahut, Jean-Michel, 2024. "Twenty-year tango: Exploring the reciprocal influence of macro-financial instability and climate risks," Journal of Economic Behavior & Organization, Elsevier, vol. 220(C), pages 717-731.
    6. Patra, Saswat & Singh, Abhay Kumar, 2025. "The impact of financial stress and equity market uncertainty on cryptocurrencies under structural breaks," International Review of Economics & Finance, Elsevier, vol. 101(C).
    7. Kanzari, Dalel & Nakhli, Mohamed Sahbi & Gaies, Brahim & Sahut, Jean-Michel, 2023. "Predicting macro-financial instability – How relevant is sentiment? Evidence from long short-term memory networks," Research in International Business and Finance, Elsevier, vol. 65(C).
    8. Gaies, Brahim & Chaâbane, Najeh & Bouzouita, Nesrine, 2024. "Navigating the storm: Time-frequency quantile dependence and non-linear causality between crypto-currency market volatility and financial instability," The Quarterly Review of Economics and Finance, Elsevier, vol. 93(C), pages 43-70.
    9. Mohamed Nihal Saleem & Yianni Doumenis & Epameinondas Katsikas & Javad Izadi & Dimitrios Koufopoulos, 2024. "Decrypting Cryptocurrencies: An Exploration of the Impact on Financial Stability," JRFM, MDPI, vol. 17(5), pages 1-21, April.
    10. Gubareva, Mariya & Shafiullah, Muhammad & Teplova, Tamara, 2025. "Corrigendum to “Cross-quantile risk assessment: The interplay of crude oil, artificial intelligence, clean tech, and other markets” [Energy Economics Volume 141, January 2025, 108085]," Energy Economics, Elsevier, vol. 141(C).
    11. Zeng, Hongjun & Abedin, Mohammad Zoynul & Zhou, Xiangjing & Lu, Ran, 2024. "Measuring the extreme linkages and time-frequency co-movements among artificial intelligence and clean energy indices," International Review of Financial Analysis, Elsevier, vol. 92(C).
    12. Ma, Yuanyuan & Zhang, Pingping & Duan, Shaodong & Zhang, Tianjie, 2023. "Credit default prediction of Chinese real estate listed companies based on explainable machine learning," Finance Research Letters, Elsevier, vol. 58(PA).
    13. Mubeen Abdur Rehman & Saeed Ahmad Sabir & Muhammad Zahid Javed & Haider Mahmood, 2024. "The Connectedness Knowledge from Investors’ Sentiments, Financial Crises, and Trade Policy: An Economic Perspective," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(4), pages 20038-20062, December.
    14. Schlicht, Haley, 2024. "Deciphering the debt: the intersection of syndicated lending and moral hazard in East Asia’s financial crisis," LSE Research Online Documents on Economics 127154, London School of Economics and Political Science, LSE Library.
    15. Gaies, Brahim & Nakhli, Mohamed Sahbi & Sahut, Jean-Michel, 2024. "Unravelling the complex interactions between sentiment of uncertainty and foreign capital flows: Evidence from Brazil and South Korea," Economic Modelling, Elsevier, vol. 141(C).
    16. Gaies, Brahim, 2024. "In search of lost social finance: How do financial instability and inequality interact?," Research in International Business and Finance, Elsevier, vol. 72(PA).
    17. Lucchetta, Marcella, 2024. "International aggregate risk: Effects on financial stability," Economics Letters, Elsevier, vol. 240(C).
    18. Gaies, Brahim & Nakhli, Mohamed Sahbi & Sahut, Jean-Michel & Schweizer, Denis, 2023. "Interactions between investors’ fear and greed sentiment and Bitcoin prices," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    19. Gaies, Brahim & Chaâbane, Najeh & Adeosun, Opeoluwa Adeniyi & Sahut, Jean-Michel, 2025. "Climate transition risks, ESG sentiment and market value: Insights from the European stock market," Energy Economics, Elsevier, vol. 148(C).
    20. Conlon, Thomas & Corbet, Shaen & Hou, Yang (Greg) & Hu, Yang & Larkin, Charles & Oxley, Les, 2024. "Understanding sentiment shifts in central bank digital currencies," Journal of Behavioral and Experimental Finance, Elsevier, vol. 44(C).

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