Investor Global Sentiment and Stock Returns Connectedness in Developed Markets

Abstract

This article investigates the dynamic connectedness between equity returns and investor sentiment indexes in developed markets. The author uses a network methodology to measure stock return connectedness and investor sentiment spillover. The study examines the role of global investor sentiment in affecting stock return connectedness by employing a quantile-on-quantile approach using data from six developed markets ranging from January 1991, to December 2020. The results show that both returns and sentiment are interconnected and that spillovers across the stock indexes were more pronounced during the Global Financial Crisis of 2008. Moreover, the results suggest that global investor sentiment contributes negatively to the connectivity of stock market returns for the central quantiles of sentiment. However, the relationship becomes positive for extremely high sentiment values.