How fear beats greed: the impact of positive and negative sentiment on global stock markets

Purpose This paper aims to investigate the impact of positive and negative sentiment on stock returns and volatilities across developed and emerging markets using the consumer confidence index as a proxy for sentiment. We conduct a comparative study of developed and emerging markets to assess whether sentiment-driven mispricing is due to overpricing or underpricing and to examine the effect of sentiment on return and risk dynamics. Design/methodology/approach We consider 31 markets consisting of 16 developed and 15 emerging markets and use the monthly amplitude-adjusted consumer confidence index (CCI) as a measure of sentiment. Then, we perform panel regression of market returns or conditional variances on investor sentiment, controlling for macroeconomic fundamentals. Findings We present three main findings. First, while sentiment levels are negatively correlated with future returns in both developed and emerging markets, these return reversals are predominantly driven by pessimistic sentiments. This suggests that fear exerts a stronger influence on markets than greed. Second, positive sentiment tends to stabilize volatility in developed markets, while negative sentiment increases risk in emerging markets. Third, mispricing effects of pessimistic sentiments appear stronger in countries with a culture of high uncertainty avoidance and low indulgence. Originality/value Understanding the effects of investor sentiment on risk and return dynamics can help investors better anticipate market corrections and volatility adjustments, especially when differentiating between developed and emerging markets. This study bridges cultural, structural and sentiment-driven perspectives to offer a comprehensive framework for understanding investor sentiment and market efficiency.