Global,local, and contagious investor sentiment |
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Authors: | Malcolm Baker Jeffrey Wurgler Yu Yuan |
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Affiliation: | 1. Harvard Business School and NBER, Baker Library 261, Boston, MA 02163, USA;2. NYU Stern School of Business and NBER, 44 West 4th Street, Suite 9-190, New York, NY 10012, USA;3. Wharton School of Business, University of Pennsylvania, 3620 Locust Walk, Suite 2300, Philadelphia, PA 19104, USA |
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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. |
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Keywords: | G11 G12 G14 G15 G17 |
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