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Abstract
In the behavioral finance literature, there are many studies modeling systematic bias and how they affect stock market efficiency; however, there are very few studies investigating the investor sentiment in the global context. The research of the effects of investor sentiment in global financial market is intriguing. Not only the existence of such a behavioral bias, but also the implications, is interesting. Further studies on this topic can focus on the market inefficiency, anomalies and contagion in international financial market. The following two essays in my dissertation focus on investor sentiment studies, specifically on how it can influence the international financial markets. To measure the investor sentiments, I apply a new survey data of sentiment provided by Sentix in the following two essays.
The first essay demonstrates that investor sentiment plays a significant role in explaining the deviations from the Uncovered Interest Rate Parity (UIP). To measure the investor sentiment, I apply new Sentix survey data including both economy sentiment index and exchange rate sentiment, the latter of which is measured by the proportions of optimistic and pessimistic investors separately. The empirical study revisits the Fama Regression with investor sentiment. To examine the effects of sentiment dynamically, a VECM framework is used to test the effects of sentiment shocks on the deviations from UIP. The results suggest that the effects of the shocks of optimistic and pessimistic exchange rate sentiments last over longer than the transitory effects of the shocks of interest rate differential or economy sentiment differential.
The second essay investigates the interdependence structure of stock market co-movements. I apply the copula approach, a method that accounts for cases in which random variables depart from the normal distribution. It first examines cross-market interdependence based on an application of the copula approach throughout different episodes and then investigates the cause of increase in interdependence during times of economic turmoil from a sentiment perspective. This essay makes three contributions to previous studies: (1) it applies the copula approach to account for stock market returns with fat tails; (2) in order to measure the interdependence of stock returns, this paper applies different functions of copulas such as the Clayton copula to capture the asymmetric response of stock market returns; and (3) it provides an explanation for the contagion—the significant increase of stock market interdependence during market downturns—from a sentiment perspective.
