Can Stock Investor Sentiment Be Contagious in China?

Abstract

This paper explores the impact of investor sentiment on financial markets in China by taking the quantile causality test. We find that government bond markets, gold markets, and foreign exchange markets are affected by stock investor sentiment, except for in the corporate bond market. In extreme situations, such as excessively optimistic or pessimistic sentiment, these markets will become more vulnerable to suffering from drastic fluctuations. On the contrary, the market return in government bonds, corporate bonds, and foreign exchange also has an influence on stock investor sentiment. Moreover, these links show various asymmetry due to the heterogeneity of different financial markets. Our results are consistent with the noise trader model, which shows the impact of investor sentiment on market returns. Hence, the authorities can sustain the stabilization of financial markets by reducing information asymmetry, guiding the rational sentiment of investors, and increasing effective regulations.Especially in certain extreme pessimistic situations, sentiment in the stock market can lead to drastic fluctuations in other financial markets [15,16], and the authorities cannot maintain market stability and continuity of development. In turn, the performance of these markets is also a remarkable barometer that leads stock investor sentiment to change [17]. Through information in different market environments, external shocks, not only make asset price fluctuate, but also result in stock investors overreacting, and this affects their investment expectations [18]. This bidirectional transmission is regarded as an important factor for the linkage among major financial markets [19]. Hence, investor sentiment plays an important role in the formation of financial market effectiveness. If investor sentiment cannot be reasonably guided, it will be difficult to suppress irrational trading and speculative bubbles and improve market efficiency.Compared with stock markets in developed countries, individual investors account for a large proportion of Chinese stock investors, which makes the whole market more emotional [20]. With a lack of social responsibility and an awareness of sustaining market efficiency, the individual Chinese investor has an underdeveloped investment education and, thus, they often show irrational investment behavior [21]. Hence, market fluctuation frequently happens, and it is difficult for investor sentiment to be properly guided. Not only do investors make irrational trades in the stock market, but they are also more likely to carry their emotions to other markets [22]. If investor sentiment in the stock market spreads to other markets and causes unexpected fluctuations in China, the pricing and operating efficiency of many financial markets will be damaged. As well as the stock market, the gold, bond, and foreign exchange markets are all financial markets with a large scale in China. If such emotional contagion exists in China, investors who excessively ignore the fundamentals will find it difficult to form th...

A systematic literature review and bibliometric analysis of noise trading

“…observed that disseminated information has a different impact on informed and uninformed traders. According toHe et al (2020), investor sentiments have an asymmetrical relationship with stock return as well as stock volatility Su et al (2020),Anusakumar et al (2017)Verma and Verma (2007); andGong et al (2022) also confirmed the Noise trading model by highlighting the fact that investor sentiments positively affect market returns.…”

Examining the Role of Government Intervention in Market Failure and Government Failure

“…Furthermore, though liquidity was important for the stability of financial markets and the growth of national economies, the liquidity of financial markets might be influenced by country risk shocks through informational asymmetry, funding constraints, and portfolio rebalancing activities (Kunjal 2022). Especially, exploring the impact of investor sentiment on financial markets in China by taking the quantile causality test, Su et al (2020) claimed that the authorities could sustain the stabilization of financial markets by reducing information asymmetry, guiding the rational sentiment of investors, and increasing effective regulations.…”

Empirical analysis of dynamic spillovers between exchange rate return, return volatility and investor sentiment

“…As the investor sentiment became popular among practitioners, some papers investigate the contagious effect of sentiment on different markets, such as gold, bond and foreign exchange markets. For example, Su et al (2020) using the quantile causality test, explore the effects of investor sentiment on government, corporate bond markets, gold and foreign exchange markets. Monthly data covers the period from July 2005 to April 2019 and the results show a positive effect of investor sentiment on government bond markets, gold and foreign exchange markets; while there is no relationship between investor sentiment and corporate bond markets.…”