Are crises sentimental?

Tao Chen*, Erin P K SO, Isabel K.M. Yan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the role of investor sentiment in signalling 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.

Original languageEnglish
Pages (from-to)962-985
Number of pages24
JournalInternational Journal of Finance and Economics
Volume26
Issue number1
Early online date28 Jul 2020
DOIs
Publication statusPublished - Jan 2021

Scopus Subject Areas

  • Accounting
  • Finance
  • Economics and Econometrics

User-Defined Keywords

  • crisis prediction
  • financial crises
  • market sentiment

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