Wednesday, April 6, 2016 | 2:00pm-3:30pm | Room 335, HSBC Business School Building

Abstract

We study how investor sentiment affects stock markets around the world. Relying on the Google search behavior of households, we construct a weekly search-based measure of sentiment for 40 countries during the 2004–2014 period. We first validate the sentiment index in the tests of sports, dual-listed firms, and earnings announcements, and then show that the sentiment measure is a contrarian predictor of country-level market returns. Two experiments suggest a causal relation between the return prediction of sentiment and theoretical channels. Finally, we document an important role of global sentiment in driving sentiment and predicting returns across countries. These findings support the view that sentiment prevails in stock markets.