Are crises sentimental?

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journal

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Original languageEnglish
Journal / PublicationInternational Journal of Finance and Economics
Online published28 Jul 2020
Publication statusOnline published - 28 Jul 2020

Abstract

This paper examines the role of investor sentiment in signaling the onset of equity crises in a panel of over 50 countries. We find that although poor economic fundamentals are significant determinants of the vulnerability of countries, a shift from bullish to bearish investor sentiment acts as the final trigger. Bearish investor sentiment in regional and local markets exhibits significant predictive power for the outbreak of equity crises in the subsequent one to eight quarters, beyond that forecasted by pure economic fundamentals. The results remain broadly unchanged even after we orthogonalize the sentiment indices to information about economic fundamentals.

Research Area(s)

  • crisis prediction, financial crises, market sentiment