The cross-over effect of irrational sentiments in housing, commercial property, and stock markets

Abstract

This paper examines the dependence in irrational sentiments across housing, commercial property, and stock markets. Our empirical results document an important and lasting impact that commercial real estate sentiment and returns have on broader financial markets. We also show that the cross-over effects of market sentiments are not consistent with cross-over effects in market returns. Sentiments and returns in housing and stock markets exhibit strong dependence on other markets, whereas they evolve independently in commercial real estate. While housing and stock market returns respond to irrational sentiment in commercial real estate markets, the opposite is not true.

Breaking new grounds: a fresh insight into the leading properties of business and consumer survey indicators

“…One would usually compare the hereby obtained results to the ones of previous studies. However, although the irrational component of economic sentiment is a well-established driver of financial markets (Lagunoff and Schreft 1999 ; Baker and Wurgler 2006 ; Verma et al 2008 ; Schmeling 2009 ; Das et al 2020 ) and housing markets (Das et al 2020 ), to the best of our knowledge, the literature is completely silent on the role of irrational sentiment in governing aggregate economic activity in particular areas such as the manufacturing industry, consumer, or retail sector. Our results clearly highlight this as a very promising direction for future research.…”

“…Barsky and Simms ( 2012 ) distinguish between animal spirits (irrational) and news (rational) shocks in a VAR framework, while a number of authors use similar argumentation to extract irrational sentiment and examine its impact on various forms of financial sector activities (e.g. Baker and Wurgler 2006 ; Corredor and Santamaria 2015 ; Das et al 2020 ; Rakovská et al 2020 ). All of these studies fragment economic sentiment into the rational component, entirely explained by macroeconomic fundamentals (facts), and the irrational component, measuring agents’ excess optimism or pessimism beyond any rationally-sourced reasoning.…”

“…This entails running regressions presented with Eq. ( 6 ), as adopted from Baker and Wurgler ( 2006 ), Corredor and Santamaria ( 2015 ), and Das et al ( 2020 ): where we alternate confidence indicators of interest (ICI, CCI, RTCI) as the dependent variables, and their reference macroeconomic series (industrial production for ICI, and personal consumption for CCI and RTCI) as corresponding independent variables. 1 In this setting, ε t represents the irrational component of sentiment.…”

The power of sentiment: Irrational beliefs of households and consumer loan dynamics

“…We adopt the terms "rational" and "irrational" sentiment from the behavioral asset pricing literature, such as Verma and Soydemir (2009), Verma et al (2008), and Das et al (2020). They all regress sentiment on macroeconomic variables and consider the residuals to be irrational sentiment, all of them following the idea of separating sentiment into its rational and irrational parts as in Wurgler (2006, 2007) and Brown and Cliff (2004).…”

Climate Change and Finance in Africa: Some Theoretical and Practical Justifications

“…Investors' sentiments towards ethical and green investing can exert a significant impact on portfolio choice. For instance, Das, Fuss, Hanle & Russ (2020) recently show that sentiments and returns in housing and stock markets exhibit a strong dependence on financial markets. In contrast, they evolve independently in commercial real estate.…”