Investor sentiment and the interdependence structure of GIIPS stock market returns: A multiscale approach

Abstract

The GIIPS economies are noted to suffer the most consequences of systemic crises. Regardless of their bad performance in crisis periods, their role(s) in asset allocation and portfolio management cannot go unnoticed. For effective portfolio management across divergent timescales, cross-market interdependencies cannot be side-lined. This study examines the conditional and unconditional co-movements of stock market returns of GIIPS economies incorporating investor fear in their time-frequency connectedness. As a result, the bi-, partial, and multiple wavelet approaches are employed. Our findings explicate that the high interdependencies between the stock market returns of GIIPS across all time scales are partly driven by investor fear, implying that extreme investor sentiment could influence stock market prices in GIIPS. The lagging role of Spanish stock market returns manifests at zero lags at high (lower) and medium frequencies (scales). At lower frequencies (higher scales), particularly quarterly-to-biannual and biannual-to-annual, Spanish and Irish stock markets, respectively, lag all other markets. Although portfolio diversification and safe haven benefits are minimal with GIIPS stocks, their volatilities could be hedged against by investing in the US VIX. Intriguing inferences for international portfolio and risk management are offered by our findings.