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

Pan, Wei-Fong

doi:10.1080/15427560.2019.1587764

Cited by 51 publications

(34 citation statements)

References 48 publications

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“…Comparing P B with P H 2 , we find that only if W o is great enough, that P H2 > P B the price of an asset substantially exceeds its basic value. Therefore, we conclude that the asset bubble is due to investor sentiment which is consistent with Pan [ 38 ] who confirms that investor sentiment positively reacts to bubble shocks. Furthermore, it is noticeable that a shock from negative news should also lead the stock price to fluctuate and should also cause the sustainability of stock price fluctuations and overreaction.…”

Section: The Dynamic Process Of Price Changesupporting

confidence: 91%

“…However, the paper restricts the value of the elasticity coefficients of the sentiment trader on the stock price change. If these restrictions are elevated, the stock price may no longer converge or the convergence time is too long, which could explain the asset bubble [ 38 ] and the financial crisis caused by investor sentiment. This paper adopts the recursive method to build a dynamic asset pricing model based on heterogeneous investors.…”

Section: Discussionmentioning

confidence: 99%

“…In conclusion, the results are robust. The behavior of the sentiment investor who enters or exits the market is the main factor that leads the stock price to fluctuate wildly and continuously and causes the sustainability of stock price fluctuations [ 22 ], the overreaction [ 35 – 37 ], the asset bubble [ 38 ], even the financial crisis.…”

Section: Examplesmentioning

confidence: 99%

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The sustainability of stock price fluctuations: Explanation from a recursive dynamic model

2021

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The sustainability of stock price fluctuations indicated by many empirical studies hardly reconciles with the existing models in standard financial theories. This paper proposes a recursive dynamic asset pricing model based on the comprehensive impact of the sentiment investor, the information trader and the noise trader. The dynamic process of the asset price is characterized and a numerical simulation of the model is provided. The model captures the features of the actual stock price that are consistent with the empirical evidence on the sustainability of stock price fluctuations. It also offers a partial explanation for other financial anomalies, for example, asset price’s overreaction, asset bubble and the financial crisis. The major finding is that investor sentiment is the key factor to understand the sustainability of stock price fluctuations.

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Section: The Dynamic Process Of Price Changesupporting

confidence: 91%

Section: Discussionmentioning

confidence: 99%

Section: Examplesmentioning

confidence: 99%

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The sustainability of stock price fluctuations: Explanation from a recursive dynamic model

2021

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“…Using these indexes or indicators, researchers explore the impact of investor sentiment (or confidence) on the price fluctuation of financial assets, such as stocks [19][20][21][22][23][24][25][26][27][28][29][30][31][32][33][34][35], commodities [36], Bitcoin [37], and gold [38]. Among others, Kim et al [27] investigate the impact of investor sentiment on the link between disagreement among investors and stock market returns and find that this relationship varies over time depending on the characteristics of investor sentiment.…”

Section: Literature Reviewmentioning

confidence: 99%

Spillover Network among Economic Sentiment and Economic Policy Uncertainty in Europe

Hernández

Kang

Jiang

et al. 2022

Systems

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We explore the directional spillover network among economic sentiment indicators and the economic policy uncertainty (EPU) index from Europe. We derive our results by fitting the directional spillover index approach to the monthly frequency data of eleven European countries, economic sentiment indicators and the European EPU index, spanning from 1 January 1987, to 1 February 2019. The empirical results indicate that the economic sentiment indicators of the largest European economies (Germany, France, and Italy) spillover with each other the most. The economic sentiment indicators of Germany and France most strongly influence the EU and Euro area economic sentiment indicators. The economic sentiment indicators of France and Italy have the most influence on the European EPU index, while the latter has the strongest influence on the economic sentiment indicators of Germany and France.

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“…In the same context, the confirmation bias can induce a particular asset allocation and creates bubbles and crashes. The arrival of initially positive information will lead traders toward optimism leading biased investors into excessive euphoria that will generate a bubble (Pan, 2020;Medhioub and Chaffai, 2018). However, negative information hits the market and pushes biased investors into pessimism leading to a crash with low prices compared to fundamentals (Pouget et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

Investor behavior and cryptocurrency market bubbles during the COVID-19 pandemic

Mnif

Salhi

Mouakhar

et al. 2022

RBF

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PurposeCryptocurrencies lack fundamental values and are often subject to behavioral bias leading to market bubbles. This study aims to investigate the contribution of the coronavirus pandemic to the creation of market bubbles.Design/methodology/approachThis study identifies four major cryptocurrency market bubbles by using the Phillips et al. (2016) (hereafter PSY) test. Subsequently, the co-movements of the coronavirus proxies with PSY measurement using the wavelet approach were studied.FindingsShort-lived bubbles are detected at the beginning of the studied period, and more extended bubble periods are identified at the end. Besides, the empirical results show evidence of significant negative co-movement between each pandemic proxy and each cryptocurrency bubble measurement.Research limitations/implicationsGiven the complex financial dynamics of the cryptocurrency markets due to some behavioral biases in some circumstances, investors can benefit from the date stamping of the bubbles bursting to make the best trading positions. In the same way, governments could support the healthy development of cryptocurrencies by preventing bubbles during such pandemics.Originality/valueThe financial bubble is commonly attributed to a change in investor behavior. Because traders and investors think they can resell the asset at a higher price in the future. This study explored the contribution of the COVID-19 pandemic in the creation of these bubbles by date stamping their occurrence and explosive periods. To the best of the authors’ knowledge, this study is the first attempt that explores the contribution of the COVID-19 pandemic to the creation of bubbles caused by a change in the investors’ behavior.

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

Cited by 51 publications

References 48 publications

The sustainability of stock price fluctuations: Explanation from a recursive dynamic model

The sustainability of stock price fluctuations: Explanation from a recursive dynamic model

Spillover Network among Economic Sentiment and Economic Policy Uncertainty in Europe

Investor behavior and cryptocurrency market bubbles during the COVID-19 pandemic

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