Skip to main content
SpringerLink
Log in

Common Sentiment and Price Contagion

  • Published:
Journal of Systems Science and Complexity Aims and scope Submit manuscript

Abstract

This paper investigates the informational role of prices in segmented markets which are shocked by a kind of common sentiment resulting from financial contagion. This common sentiment bridges the connection between prices learned by rational traders and thus can weaken the uncertainty from noise shock. The authors find that there exist comovement effect and crowding-out effect in information acquisition among different markets. These two effects capture financial contagion when markets experience large downward or upward tendency, which offers an explanation for market crisis to some extent.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  1. Barberis N, Shleifer A, and Wurgler J, Comovement, Journal of Financial Economics, 2005, 75(2): 283–317.

    Article  Google Scholar 

  2. Yuan K, Asymmetric price movements and borrowing constraints: A rational expectations equilibrium model of crises, contagion, and confusion, The Journal of Finance, 2005, 60(1): 379–411.

    Article  Google Scholar 

  3. Vives X, Information and Learning in Markets: The Impact of Market Microstructure, Princeton University Press, Princeton, 2010.

    Book  Google Scholar 

  4. Grossman S J and Stiglitz J E, On the impossibility of informationally efficient markets, The American Economic Review, 1980, 70(3): 393–408.

    Google Scholar 

  5. Almazan A, Brown K C, Carlson M, et al., Why constrain your mutual fund manager?, Journal of Financial Economics, 2004, 73(2): 289–321.

    Article  Google Scholar 

  6. Goldstein I, Li Y, and Yang L, Speculation and hedging in segmented markets, The Review of Financial Studies, 2013, 27(3): 881–922.

    Article  Google Scholar 

  7. Duffie D, Presidential address: Asset price dynamics with slow-moving capital, The Journal of Finance, 2010, 65(4): 1237–1267.

    Article  Google Scholar 

  8. Mendel B and Shleifer A, Chasing noise, Journal of Financial Economics, 2012, 104(2): 303–320.

    Article  Google Scholar 

  9. Ackert L and Deaves R, Behavioral finance: Psychology, decision-making, and markets, Cengage Learning, 2009.

    Google Scholar 

  10. Cespa G and Vives X, The beauty contest and short-term trading, The Journal of Finance, 2015, 70(5): 2099–2154.

    Article  Google Scholar 

  11. Hassan T A and Mertens T M, Market sentiment: A tragedy of the commons, The American Economic Review, 2011, 101(3): 402–405.

    Article  Google Scholar 

  12. Vives X and Yang L, Costly interpretation of asset prices, Working paper, 2017.

    Google Scholar 

  13. Chiang C W, Investor sentiment and the cross-section of stock returns, Journal of Finance, 2007, 61(4): 1645–1680.

    Google Scholar 

  14. Ho C and Hung C H, Investor sentiment as conditioning information in asset pricing, Journal of Banking & Finance, 2009, 33(5): 892–903.

    Article  Google Scholar 

  15. Hilliard J, Narayanasamy A, and Zhang S, The role of market sentiment in asset allocations and stock returns, Working paper, 2018.

    Google Scholar 

  16. Kodres L E and Pritsker M, A rational expectations model of financial contagion, The Journal of Finance, 2002, 57(2): 769–799.

    Article  Google Scholar 

  17. Longstaff F A, The subprime credit crisis and contagion in financial markets, Journal of Financial Economics, 2010, 97(3): 436–450.

    Article  Google Scholar 

  18. Chowdhry B and Nanda V, Multimarket trading and market liquidity, The Review of Financial Studies, 1991, 4(3): 483–511.

    Article  Google Scholar 

  19. Madhavan A, Consolidation, fragmentation, and the disclosure of trading information, The Review of Financial Studies, 1995, 8(3): 579–603.

    Article  Google Scholar 

  20. Cespa G and Foucault T, Illiquidity contagion and liquidity crashes, The Review of Financial Studies, 2014, 27(6): 1615–1660.

    Article  Google Scholar 

  21. Da Z, Larrain B, Sialm C, et al., Price pressure from coordinated noise trading: Evidence from pension fund reallocations, Working Paper, 2015.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. School of Economics and Management, Beijing University of Chemical Technology, Beijing, 100029, China

    Qingduo Zeng & Qiang Zhang

  2. School of Economics and Management, Beihang University, Beijing, 100191, China

    Shancun Liu

Authors
  1. Qingduo Zeng
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Shancun Liu
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Qiang Zhang
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Qiang Zhang.

Additional information

This research was supported by the National Natural Science Foundation of China under Grant No. 71771008, the Central University Fund under Grant No. PTRW1808, the Fundamental Research Funds for the Central Universities under Grant No. XK1802-5 and the Supporting Plan for Top Talents in Humanities and Social Sciences under Grant No. YWF-19-BJ-W-45.

This paper was recommended for publication by Editor WANG Shouyang.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Zeng, Q., Liu, S. & Zhang, Q. Common Sentiment and Price Contagion. J Syst Sci Complex 32, 1426–1437 (2019). https://doi.org/10.1007/s11424-019-7430-y

Download citation

  • Received:

  • Revised:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11424-019-7430-y

Keywords

Search

Navigation