Heterogeneity and sentiment in the stock market

In this paper, we investigate the question whether the changing beliefs in different countries may be driven by common investors' sentiment. We examine this issue by investigating the relationship between the degree of switching in two major stock markets, the USA and the UK, for a long period of time. Our empirical results show that: 1) there is a considerable degree of switching in both markets, confirming the presence of heterogeneous beliefs; 2) there is a significant correlation between the degree of switching in the USA and the UK, giving some support to the hypothesis that common sentiment could drive the behaviour of market participants in both markets and that investors act on this common sentiment; 3) there is a change in correlations between weights of switching between investment strategies over time, reaching its heights before periods of crises (the Great Depression and WWII) and showing an upward trend starting from the mid 1970s.