From sentiment to systemic risk: Information transmission in Asia-Pacific stock markets

ABSTRACT

This study provides a comprehensive sentiment connectedness analysis in Asia-Pacific. We implement a time-frequency framework and a quantile connectedness approach while analyzing the impact of three crises the global financial crisis, the Chinese Stock market turbulence (2015-2016), and the COVID-19 pandemic. We find a significant sentiment spillover across markets, though the magnitude is more pronounced in the long run. Although sentiment connectedness is higher during extreme states of the sentiment than in the average state, the systemic risk intensifies further when the sentiment is exceptionally high. Notably, Japan appears to contribute moderately to the sentiment network, while China is the lowest contributor. The three crises strengthened the total sentiment connectedness, while the COVID-19 pandemic had the most substantial impact. Our sentiment network findings have insightful implications on cultural and behavioral factors that drive sentiment systemic risk in Asia-Pacific.