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

Author

Listed:
  • 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'.

Suggested Citation

  • Yawen Hudson & Christopher J. Green, 2013. "Born in the USA? Contagious investor sentiment and UK equity returns," Discussion Paper Series 2013_13, Department of Economics, Loughborough University, revised Nov 2013.
  • Handle: RePEc:lbo:lbowps:2013_13
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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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    References listed on IDEAS

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    More about this item

    Keywords

    Investor sentiment; contagion; institutional investors; equity returns;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G2 - Financial Economics - - Financial Institutions and Services

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