Excess Stock Return Comovements and the Role of Investor Sentiment (original) (raw)

There is an established literature suggesting that correlations between international equity markets is increasing. In this paper, we examine this increase in comovement and investigate the sources of this comovement. Our analysis shows that correlations between international equity indeed have been growing. However, decomposing returns into a fundamental and non-fundamental part reveals that the increase in correlation is driven by the non-fundamental part. Further analysis shows that the comovement of returns is driven by investor sentiment (American Association of Individual Investors index) and this sentiment only explains the comovement of the non-fundamental part of returns. Our findings provide evidence for behavioral explanations of comovement, such as categorization and habitat formation (see , Journal of Finance). JEL Codes: C32; G15.