The Interaction between Market Sentiments in the U.S. Financial Market and Global Equity Market

  •  Huijian Dong    
  •  Xiaomin Guo    


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.

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