Abstract
This paper adopts the volatility index and Baker-Wurgler index as the U.S. financial market sentiment measures. Using monthly data from June 1965 to December 2010, we identify the causal relationships between sentiment and the performance of global equity markets. We include 23 G20 market indices, 28 European indices, 25 Asia-Pacific indices, and 10 Americas indices, and employ Granger causality procedure to explore the linkages. We find that the international equity markets are not greatly affected by the U.S. financial market sentiment. The type of extreme sentiment, whether it is optimistic or pessimistic, is irrelevant to its influential power. The equity markets that are affected by the volatility index do not cluster in any region. In contrast, the majority of global equity markets can Granger cause the U.S. investor sentiments, with optimistic market atmosphere being more affected. The equity markets in the Americas and Europe are highly influential to the U.S. investors, compared to the Asian markets.
Highlights
This paper employs the market sentiments time series data and global equity market prices and returns to exam the interaction between the U.S investor sentiments and the international stock performances
We find that international equity markets are not greatly affected by the U.S financial market sentiment
Before we proceed to the Granger causality tests, we first run the standard ADF unit root tests on all the time series variables
Summary
This paper employs the market sentiments time series data and global equity market prices and returns to exam the interaction between the U.S investor sentiments and the international stock performances. While previous studies shed some light on the financial market contagion across countries, these researches mainly focus on the contagion among the homogeneous variables: equity prices, returns, or volatility. The Chicago Board Options Exchange (CBOE) VIX indices, which is often referred to as the "investor fear gauge”, are the benchmark for stock market volatility It is based on market portfolio index option prices and incorporates information from the volatility skewness by setting a wide range of exercise prices. The global equity markets and the U.S financial markets are mutually less influential, when the U.S sentiment is measured by the BW index.
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