How does investor sentiment affect stock market crash risk? Evidence from Asia-Pacific markets

This study aims to examine the effect of investor sentiment on stock market crash risk in the Asia-Pacific region. The research employs principal components analysis (PCA) to construct an investor sentiment index, while the Method of Moments Quantile Regression (MMQR) is used to analyze monthly data of 16 Asia-Pacific stock markets. The findings show that investor sentiment positively impacts on crash risk in the middle to higher quantities. Moreover, regional sentiment significantly increases stock market crash risk, particularly at higher quantiles, while local sentiment generally reduces crash risk at the lower to middle quantiles. Besides, the magnitude and direction impact of investor sentiment on stock market crash risk is heterogeneous across market levels. Specifically, the results indicate that at higher quantiles of risk, investor sentiment increases crash risk in developed and emerging markets, while it decreases crash risk in frontier markets. This paper not only provides support for behavioral theories but also have implications for global investors, portfolio managers, and policymakers.