Revisiting the investor sentiment–stock returns relationship: A multi-scale perspective using wavelets

Abstract

This paper employs SBW proposed by Baker and Wurgler (2006) to investigate the nonlinear asymmetric Granger causality between investor sentiment and stock returns for US economy while considering different time-scales. The wavelet method is utilized to decompose time series of investor sentiment and stock returns at different time-scales to focus on the local analysis of different time horizons of investors. The linear and nonlinear asymmetric Granger methods are employed to examine the Granger causal relationship on similar time-scales. We find evidence of strong bilateral linear and nonlinear asymmetric Granger causality between longer-term investor sentiment and stock returns. Furthermore, we observe the positive nonlinear causal relationship from stock returns to investor sentiment and the negative nonlinear causal relationship from investor sentiment to stock returns.