Abstract
We shed new light on the relevance of rational expectations and irrational exuberance of U.S. individual and institutional investors on Pacific-Basin stock returns. We find insignificant effects of irrational exuberance and significant effect of rational expectations on Asian markets with varying degrees of intensity. There are greater responses of Hong Kong, Malaysia, Philippines, and Singapore while weaker linkages with Taiwan, Thailand, and Korea. Overall evidence suggests that rational expectations of institutional investors are transmitted to a greater extent than those of individual investors. These results are consistent with the view that international effects of the U.S. market can be attributed to rational investor sentiments.
Highlights
The central task in financial economics is to identify the systematic risks that drive asset prices and expected returns (Campbell, 2000; Cochrane, 2000)
Using the investor sentiments data at the individual and institutional level, provided by American Association of Individual Investors and Investors Intelligence and the vector auto regression (VAR) models we find the following results: first, we do not find any significant effect of irrational exuberance of the U.S investors on Pacific-Basin stock market returns
We investigate whether the rational expectations and irrational exuberance of the U.S individual and institutional investors are propagated to Pacific-Basin stock markets, Hong Kong, Malaysia, Philippines, Singapore, Taiwan, Thailand, and Korea
Summary
The central task in financial economics is to identify the systematic risks that drive asset prices and expected returns (Campbell, 2000; Cochrane, 2000). Following the ‘noise trader model’ of DSSW (1990), several empirical studies examine the influence of investor sentiments on stock prices (Brown and Cliff, 2004a, 2004b; Lee et al 2002; Fisher and Statman, 2000; Clarke and Statman, 1998; Solt and Statman 1988; De Bondt, 1993) Overall, these studies provide evidence in favor of strong co-movements between investor sentiment and the stock market returns recognizing the existence of individual investor sentiments, as well as institutional investor sentiments. It is important for policymakers to consider such spillover effects in their international policy making decisions and for investors in their portfolio allocation decisions involving stock markets movements This remainder of this paper is organized as follows: section two reviews the existing literature on investor sentiments and stock prices while section three presents the model.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
