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Does Investor Sentiment Drive Stock Market Bubbles? Beware of Excessive Optimism!

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  • Wei-Fong Pan
Abstract
The author examines the relationship between stock market bubbles and investor sentiment, as proxied by consumer confidence indices. The results indicate that investor sentiment significantly explains stock bubble probability and bubble expansion. Evidence suggests that investor sentiment positively affects the probability of stock bubble occurrences and bubble sizes. Evidence from impulse responses also suggests that investor sentiment positively reacts to bubble shocks. Further, the author observes that overly optimistic investor sentiment (a sentiment index that is too high) can be a useful predictor of a bubble burst. These findings are robust based on various model specifications.

Suggested Citation

  • Wei-Fong Pan, 2020. "Does Investor Sentiment Drive Stock Market Bubbles? Beware of Excessive Optimism!," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 21(1), pages 27-41, January.
    • Handle: RePEc:taf:hbhfxx:v:21:y:2020:i:1:p:27-41
    DOI: 10.1080/15427560.2019.1587764
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    Citations

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    Cited by:

    1. Foglia, Matteo & Miglietta, Federica, 2024. "Does every cloud (bubble) have a silver lining? An investigation of ESG financial markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    2. van Eyden, Reneé & Gupta, Rangan & Nielsen, Joshua & Bouri, Elie, 2023. "Investor sentiment and multi-scale positive and negative stock market bubbles in a panel of G7 countries," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    3. Renee van Eyden & Rangan Gupta & Xin Sheng & Joshua Nielsen, 2023. "Predicting Multi-Scale Positive and Negative Stock Market Bubbles in a Panel of G7 Countries: The Role of Oil Price Uncertainty," Working Papers 202332, University of Pretoria, Department of Economics.
    4. Gupta, Rangan & Nel, Jacobus & Nielsen, Joshua, 2023. "US monetary policy and BRICS stock market bubbles," Finance Research Letters, Elsevier, vol. 51(C).
    5. Oguzhan Cepni & Rangan Gupta & Jacobus Nel & Joshua Nielsen, 2023. "Monetary Policy Shocks and Multi-Scale Positive and Negative Bubbles in an Emerging Country: The Case of India," Working Papers 202305, University of Pretoria, Department of Economics.
    6. Cheng, Feiyang & Wang, Chunfeng & Cui, Xin & Wu, Ji & He, Feng, 2021. "Economic policy uncertainty exposure and stock price bubbles: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 78(C).
    7. Ben Osman, Myriam & Galariotis, Emilios & Guesmi, Khaled & Hamdi, Haykel & Naoui, Kamel, 2024. "Are markets sentiment driving the price bubbles in the virtual?," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 272-285.
    8. Seok, Sangik & Cho, Hoon & Ryu, Doojin, 2024. "Dual effects of investor sentiment and uncertainty in financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 300-315.
    9. Sharneet Singh Jagirdar & Pradeep Kumar Gupta, 2023. "Value and Contrarian Investment Strategies: Evidence from Indian Stock Market," JRFM, MDPI, vol. 16(2), pages 1-19, February.
    10. Kaiyuan Yang & Xiaoyan Huo & Zhaoyu Sun & Peigong Li & Stavros Sindakis & Saloome Showkat, 2024. "Investigating The Role of Accounting Information Comparability in Mitigating Stock Price Crash Risk: Evidence from China’s Knowledge-Based Economy," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(3), pages 10022-10056, September.
    11. Caraiani, Petre & Gupta, Rangan & Nel, Jacobus & Nielsen, Joshua, 2023. "Monetary policy and bubbles in G7 economies using a panel VAR approach: Implications for sustainable development," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 133-155.
    12. Arbab Khalid Cheema & Wenjie Ding & Qingwei Wang, 2023. "The cross-section of January effect," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 513-530, October.

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