An insight into the implications of investor sentiment on crash risk in Asia–Pacific stock markets: are uncertainty factors important?

Purpose This study aims to examine the effect of investor sentiment on stock market crash risk in the Asia–Pacific region and the moderating role of uncertainty factors. Design/methodology/approach This research uses principal component analysis to construct an investor sentiment index of 17 Asia–Pacific stock markets before analyzing the data through hierarchical regression with the feasible generalized least squares method. Findings The empirical results show that investor sentiment has a positive impact on crash risk in the Asia–Pacific stock markets. This impact is more significant in advanced economies compared to emerging markets and developing economies. The nexus between investor sentiment and stock market crash risk is increased by economic policy uncertainty but decreased by uncertainty from pandemics. Research limitations/implications This study only investigates the moderating roles of global uncertainty factors but not local uncertainty factors. In addition, the sentiment of different investor groups has not been examined yet. Practical implications The findings of this study are relevant for global investors, portfolio managers and policymakers. Investors and portfolio managers can use sentiment indicators to predict downturns and adjust strategies, whereas policymakers can leverage these insights to design regulations that mitigate systemic risks during global uncertainties. Originality/value This study expands the literature on the relationship between investor sentiment and stock market crash risk, providing updated insights into sentimental bias in behavioral finance.