The relationship between emerging and developed market sentiment: A wavelet-based time-frequency analysis

Abstract

This paper examines the causal relationship between developed and emerging market sentiment. Our analysis also extends to test whether the causality effect between developed and emerging market investor sentiment translates into significant implication for equity returns. Results reveal that in the short-run emerging market sentiment is not correlated with any developed market sentiment. In the long-run, a strong correlation is observed between emerging and developed market sentiment (US sentiment). The US and Europe sentiment affect emerging market sentiment both in the short and long-run. Emerging markets affect the US and Europe sentiment only in the long-run. The bidirectional causality between emerging market and developed market (the US and Europe) sentiment in the long-run suggests that sentiments index of two economies may feed on each other during crisis periods. The coherency tests suggest that the sentiment contagion effect between developed and emerging market is intensified during crisis periods.