Investor sentiment and stock returns. The Spanish case

This paper analyzes the investor sentiment effect in the Spanish stock returns. The findings show that local sentiment has a significant influence on their own future returns, not only on the market as a whole but also on stocks that are hard to value and more costly and risky to arbitrage. We also find that both global and local sentiment have a significant influence on returns, the latter probably linked to country cultural or institutional characteristics. Although the causality runs from global sentiment to local sentiment, we do not find evidence that private capital flows are one mechanism by which sentiment spreads across markets. The analysis of the sentiment effect during the latest financial crisis increases the robustness of our results. However, global sentiment absorbs the effect of local sentiment, which indicates the global character of the crisis.