Abstract
We take a fresh look at the interaction between crude oil prices and investor sentiment from the novel perspective of both the time and the frequency domains. By using principal component analysis, we first construct an investor sentiment indicator. Then, crude oil prices are decomposed into three oil price shocks through an SVAR model. Lastly, the dynamic relationship between investor sentiment and oil price shocks is comprehensively studied from both the time and the frequency domains via wavelet coherence analysis. Our results show the leading position of crude oil prices in the co-movement relationship with investor sentiment. Further, we distinguish the different effects of oil price shocks on investor sentiment at different times and frequencies. We also find that the patterns of the co-movement between oil prices (oil price shocks) and investor sentiment change not only with time but also with frequency.
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