Abstract

AbstractInternational economic exchanges have become more frequent, and the degree of the mutual influences of investor sentiment in the stock markets of various countries has been increasing. Therefore, the study of cross‐country spillover effects of investor sentiment is of great relevance to the analysis of financial market linkage and the diffusion mechanisms between countries. This study examined the directions and levels of investor sentiment spillovers in 10 countries from 2003 to 2020 by constructing aggregate and directional spillover indices and analyzing the static and dynamic characteristics as well as the network structures of the spillover effects. The results revealed that (1) investor sentiment had significant cross‐country spillover effects and their intensities were time‐varied, with the total sentiment spillover index rising sharply in response to extreme events, such as the subprime mortgage crisis, the European sovereign debt crisis, the United Kingdom's (U.K.) Brexit policy, and the coronavirus pandemic. (2) The spillover effects were impacted by the level of economic and financial development. Overall, developed countries had higher levels of spillover than did developing countries. (3) Countries that were highly correlated with extreme events had stronger spillover effects. For example, the United States and the U.K. were the main net “exporters” of sentiment during the subprime crisis, and Germany became the top “exporter” during the European sovereign debt crisis. Our findings have important implications for policymakers who aim to understand capital markets correlations and promote regulatory coordination across countries.

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