Global, Local, and Contagious Investor Sentiment

47 Pages Posted: 8 Jun 2009 Last revised: 11 Mar 2012

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Jeffrey Wurgler

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Yu Yuan

Shanghai Mingshi Investment Company; University of Pennsylvania - Wharton Financial Institutions Center

Multiple version iconThere are 2 versions of this paper

Date Written: October 17, 2011

Abstract

We construct investor sentiment indices for six major stock markets and decompose them into one global and six local indices. In a validation test, we find that relative sentiment is correlated with the relative prices of dual-listed companies. Global sentiment is a contrarian predictor of country-level returns. Both global and local sentiment are contrarian predictors of the time series of cross-sectional returns within markets: When sentiment is high, future returns are low on relatively difficult to arbitrage and difficult to value stocks. Private capital flows appear to be one mechanism by which sentiment spreads across markets and forms global sentiment.

Keywords: Sentiment, Return predictability

JEL Classification: G11, G12, G14, G15, G17

Suggested Citation

Baker, Malcolm P. and Wurgler, Jeffrey A. and Yuan, Yu, Global, Local, and Contagious Investor Sentiment (October 17, 2011). Journal of Financial Economics (JFE), Vol. 104, No. 2, 2012, NYU Working Paper No. FIN-09-002, Available at SSRN: https://ssrn.com/abstract=1415226

Malcolm P. Baker

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)

HOME PAGE: http://www.people.hbs.edu/mbaker

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeffrey A. Wurgler (Contact Author)

NYU Stern School of Business ( email )

Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
212-998-0367 (Phone)
212-995-4233 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jwurgler/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yu Yuan

Shanghai Mingshi Investment Company ( email )

488 M Yincheng Road
Shanghai
China

University of Pennsylvania - Wharton Financial Institutions Center

3733 Spruce Street
Philadelphia, PA 19104-6374
United States

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