Investor sentiment and stock markets during the war in pandemic time

Purpose This paper aims to use three proxy variables – initial public offerings, trading volume and business confidence index (BCI) to construct an investor sentiment index both for the USA and China, taking into account the challenging periods of the COVID-19 pandemic and the Russo-Ukrainian conflict. Design/methodology/approach Based on monthly data for a period from January 2009 to June 2022, this paper uses data of BCI, consumer confidence index (CCI), gross domestic product, trading volume and Fama and French (1993) factor data; linear regression of single and multifactor model; and EGARCH-M model for analyzing the effect of investor sentiment on stock market return and volatility, both in the USA and China. Findings The empirical results indicate the suitability of BCI over CCI as a measure of investor sentiment, both in the USA and China. The results indicate that investor sentiment has a significant positive effect on the excess returns in the stock market in both countries. Moreover, the effect of investor sentiment is higher in China than it is in the USA. Such an effect of investor sentiment is significant and fluctuates asymmetrically in the short run but loses its significance in the long run. Optimistic investor sentiment has a larger effect on the stock market volatility in the USA, while the pessimistic investor sentiment has a larger effect in the Chinese stock market. Originality/value This paper focuses on finding a more suitable proxy for investor sentiment from BCI or CCI. This paper also contributes by including both optimism and pessimism in explaining the stock return and volatility in both markets. The overall findings are important for understanding investor behavior in different market conditions.