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

Additions to Market Indices and the Comovement of Stock Returns Around the World

IMF Working Papers, 2011

Using newly-constructed data covering the last decade, we document that, in most of forty markets, when added to the main index, firms' returns experience an increase in comovement with the rest of the index, reflected in higher beta and greater explanatory power of the market return. Stock turnover and analyst coverage also typically increase upon inclusion. Using various tests, we find the demand-based view of comovement (the category/habitat theories of to provide a good explanation for many of our findings. Some results, though, suggest that information-related factors are also important in explaining the increased comovement. JEL Classification Numbers: G11; G12; G14; G15

The Effect of U.S. Investor Sentiment on Cross-Listed Securities Returns: A High-Frequency Approach

2021

This paper studies the impact of a high-frequency investor sentiment measure (New FEARS) on the returns of foreign securities listed in U.S. markets as American Depository Receipts (ADRs). We recreate a high-frequency investor sentiment measure by aggregating search volume indices (SVIs) for a set of negative economic search terms. We find that ADR aggregate market returns exhibit a negative reaction to increases in searches for negative economic terms such as “recession”, “crisis”, and “bankruptcy” by U.S. households. This is the first paper to measure the effects of high-frequency investor sentiment on cross-listed securities. Moreover, the results are consistent throughout our study regardless of the variation of sentiment and aggregate market return measure we use. We also explore ADR regional market indices and show that Latin American ADRs are more sensitive to this investor sentiment measure.

Is Investor Sentiment Contagious? International Sentiment and UK Equity Returns

SSRN Electronic Journal, 2013

This paper contributes to a growing body of literature studying investor sentiment. Separate sentiment measures for UK investors and UK institutional investors are constructed from commonly cited sentiment indicators using the first principle component method. We then examine if the sentiment measures can help predict UK equity returns, distinguishing between "turbulent" and "tranquil" periods in the financial markets. We find that sentiment tends to be a more important determinant of returns in the run-up to a crisis than at other times. We also examine if US investor sentiment can help predict UK equity returns, and find that US investor sentiment is highly significant in explaining the UK equity returns.

What drives correlation between stock market returns? : International evidence

2005

This paper proposes to model time-varying conditional correlation as a function of conditional volatilities and possible additional explanatory variables via logit-type regression. The advantage of this approach is that it allows us to study the contributions of internal national market volatilities, external world market volatility, and some other factors to the correlation between stock market returns. Empirical investigation of the incremental effect of volatility on correlation is reported for a number of stock markets in North America, Asia, and Europe. Our results reveal that time-varying correlations between stock markets are primarily dependent on national and world market volatilities. Weaker evidence is found that correlations are driven by market downturns. Also, we find that correlations have been increasing between national markets in recent years.

The structure of international stock market returns

The behavior of international stock market returns in terms of rate of return, unconditional volatility, skewness, excess kurtosis, serial dependence and long-memory is examined. A factor analysis approach is employed to identify the underlying dimensions of stock market returns. In our approach, the factors are estimated not from the observed historical returns but from their empirical properties, without imposing any restriction about the time dependence of the observations. To identify clusters of markets and multivariate outliers, factor analysis is then used to generate factor scores. The findings suggest the existence of meaningful factors which determine the differences in terms of the dependence structure between developed and emerging market returns.

Identifying Asymmetric Comovements of International Stock Market Returns

Journal of Financial Econometrics, 2013

Based on a new approach for measuring the comovements between stock market returns, we provide a nonparametric test for asymmetric comovements in the sense that stock market downturns will lead to stronger comovements than market upturns. The test is used to detect whether asymmetric comovements exist in international stock markets. We find the following empirical facts. First, asymmetric comovements exist between the United States (U.S.) stock market and the stock markets for Canada, France, Germany, and the United Kingdom (U.K.), but the data are unable to reject the null hypothesis of the symmetric comovements between the U.S. and Japanese stock markets. Second, either a larger negative drop or a positive increase in stock prices leads to stronger comovements of stock market returns, indicating that comovements in the data are different from comovements implied by a bivariate symmetric distribution, which implies that comovements tend to zero as the market returns become more positive or more negative.

Are Stock Markets Interdependent? An Empirical Study of Selected Market Indices

2016

It has been acclaimed by various researchers that international diversification has reduced its charm as return-risk of the world markets are highly correlated due to information spillover effect and globalization. This study examines inter linkages and interactions, if any, among the selected twelve indices of developed and emerging economies. The study applies descriptive statistics, correlation coefficients and Granger Causality test to check basic characteristics of each indices and their correlation and impact on each other. Granger Causality test for some indices shows that return of one market index had causal influence on return in other market index. The finding of this paper gives good insights to the international investors who are looking to reduce risk for a given level of return.

The comovements in international stock markets: new evidence from Latin American emerging countries

Applied Economics Letters, 2010

We analyze the time-variations of conditional correlations between selected Latin American emerging markets and between them and the World stock market to further shed light on the issues of capital market integration and portfolio diversification. The cross-market correlations are empirically estimated from the Engle (2002)'s DCC-GARCH model. Bai and Perron (2003)'s structural break analysis technique is also employed to test for possibly changing nature of stock market comovements. Main findings of the paper are as follows. First, the degree of cross-market comovements changed over time and has significantly increased since 1994 and onwards, which is to the large extent informative of increasing market integration. Despite the significant interdependencies among the studied markets, room for international portfolio diversification nevertheless seems largely possible. Second, it is demonstrated that the cross-market comovements are subjected to various regime shifts due essentially to major stock market events. Finally, the purpose that stock markets move much more together in times of crisis than in normal times can not be rejected according to our empirical evidence.