How investor sentiments spillover from developed countries to developing countries?

Abstract

This paper applies a sentiment index to check the influence of regional developed countries like Japan and Germany on the sentiments in regional developing countries like Pakistan and Turkey, respectively. The index has been created using a principal component approach with modified proxies. The results indicate that there is a significant influence of developed markets on developing markets also the sentiment index created in this study is good indicator regarding the return pattern of the stock exchange. This study has followed the footsteps of previous studies for methodology and the time period which is used ranged from 29 December 2004 to 31 December 2014. The weekly data has been collected with Wednesday prices so to avoid the white noise, start-of-the week and end-of-the week effect.

Keywords:

• investor sentiments
• investor sentiment index
• STURN
• RSI
• MFI
• IBOR
• foreign markets

Public Interest Statement

This research is beneficial for academicians and practitioners. It is an application of behavioral finance on the real-world scenario. It has explained that stock markets are prone to the sentiments of investors and subject to the influence of other stock markets as well. The study is helpful for the professional investors like brokers as they can consider the sentiments of the markets while investing. Similarly, the academic scholars can also investigate other variables and different relationships with the sentiment index to expand the scope of behavioral finance. This article has unveiled that behavioral finance and economics are complementary subjects with technical and classical finance to study stock market behavior and equity premium puzzles. The scholars interested in the realm of behavioral finance can use our findings in their research on the same subject. This study is beneficial as well as an attempt for the development of the scope of behavioral finance.

Notes

1. Classification of countries of the world on the basis of development by United Nations can be checked here www.un.org/en/development/desa/policy/wesp/wesp.../2012country_class.pdf.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Muhammad Zia Ur Rehman

Muhammad Zia Ur Rehman has held positions of Lecturer of Finance at National Textile University Faisalabad, PhD Scholar at International Islamic University Islamabad and Co-PI at the HEC (Higher Education Commission) Research Project.

He specializes in corporate behavioral finance, global financial markets, micro structure of financial markets, innovative research epistemology and international Finance. He is a prolific research scholar. He has several international and national publications having focus of finance and business research.