Dynamic connectedness between investors’ sentiment and asset prices: A comparison between major markets in Europe and USA

In this study, we use the GARCH-MIDAS model and its extensions to provide new insights on the impact of investor sentiment on asset prices focusing on major market indices in Europe and that of USA. Specifically, we account for leverage, thresholds, and structural heterogeneity in the volatility behaviour of the indices. Furthermore, we decompose the total conditional volatility of the indices into short- and long-term components. Our findings indicate that volatility of the sampled indices, at any given period, is notably characterized by the type of news (good/bad), extreme events, and more importantly, investors’ sentiments. We also find that volatility in the United States conveys significant information to the UK and the Euro area. Although the volatility in the UK has little effect on the Euro area, the volatility from the latter however cascades to the UK significantly. Our findings are robust having passed through a battery of diagnostic tests.