Should the Stock be Held in Fear Sentiment?

ABSTRACT Investor sentiment significantly increases the vulnerability of financial markets and the fluctuations in asset prices. In this scenario, this research examines the nexus between stock prices (SP) and the fear and greed index (FGI) in the G7 countries, further exploring the hedging potential of stocks during periods of heightened fear sentiment. Utilizing the quantile correlation and quantile partial correlation methods, we find that the Japanese stock market can withstand short‐term shock of fear sentiment across the full sample, as well as the pandemic and Russia–Ukraine conflict period. However, the short‐term negative effects of FGI on other SPs shift in the medium and long term. Furthermore, results from the sub‐sample analysis indicate that market uncertainty stemming from the pandemic and the Russia–Ukraine war heightens investors’ risk aversion towards the stock market, resulting in a sharp short‐term decline in SP. In the long term, investors can incorporate G7 stocks into their portfolios to mitigate investment losses arising from fear sentiment. Given the complex international environment and volatile market sentiment, governments should closely monitor investor sentiment to alleviate the adverse effects triggered by the fluctuations in SP.