The Nonlinear Relationship between Investor Sentiment and Stock Crash Risk Under the Regime of Epu-Evidence from China's Individual Stock and Market

This paper elaborates on the motivation and effect of investor sentiment by combining behavioral finance theories. We respectively utilize the PSTR model and LSTVAR model to investigate the nonlinear relationship at the firm level and market level. The results of our study show that firm-specific investor sentiment significantly increases stock price crash risk. This positive impact is particularly evident when the Economic Policy Uncertainty (EPU) is at its highest. However, market investor sentiment decreases market crash risk regardless of EPU level. This negative relation is attenuated when the market experiences significant EPU. The empirical results suggest that firm-specific investor sentiment is more susceptible to irrational sentiments and economic policy signals, thereby increasing stock price crash risk. However, market arbitrageurs can mitigate this deviation. Our findings provide updated insights into noise traders in behavioral finance