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An analysis of systematic risk in worldwide econonomic sentiment indices

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  • Luu, Duc Thi
  • Yanovski, Boyan
  • Lux, Thomas

Abstract

In this paper, we investigate the temporal dynamics of correlations between sentiment indices worldwide. Employing the tools of Random Matrix Theory (RMT) and Principal Component Analysis (PCA), our paper aims to extract latent information embedded in the interactions between economic and business sentiment indices around the world. We find that: (i) The dynamics of the sentiment indices across countries can be well explained by the evolution of a single factor (the "market mode"), (ii) during most periods, some groups of countries exhibit sentiment dynamics less associated with (or divergent from) the market mode, while (iii) during the financial crisis, no country or group of countries has been able to escape the market mode, which accounts for almost all movements in the indices. We argue that strong "global" information signals, like the collapse of the US housing market in 2007, can lead to a homogenization of the expectation structure around the world, as such information can provide a coordination signal for a global phase of low confidence.

Suggested Citation

  • Luu, Duc Thi & Yanovski, Boyan & Lux, Thomas, 2018. "An analysis of systematic risk in worldwide econonomic sentiment indices," Economics Working Papers 2018-03, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:201803
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    More about this item

    Keywords

    Sentiment Index; Correlations; Financial Crisis; Random Matrix Theory; Principal Component Analysis;

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • G01 - Financial Economics - - General - - - Financial Crises

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