Essay 3 investigates the relation between proxies for investor sentiment and stock market crises and recoveries on international indices. Using an Early-Warning-System (EWS) model, the essay examines whether investor sentiment is a useful predictor for the occurrence of stock market crises and early signs of recovery. Three alternative proxies are used to measure investor sentiment, including previously cited measures of stock market riskiness, investors' risk aversion and investors' optimism about stock markets. The results show that investor sentiment is overall a significant predictor of the occurrence of crises within a one year period, and that the addition of sentiment into early warning signal models of stock market crises can improve the predictive performance of the model (increases in investor sentiment increase the probability of occurrence of a crisis, which is in line with previous contributions finding a negative lead-lag relation between sentiment and stock returns). The extension of the model to early signs of recoveries also shows that sentiment is a reliable predictor. The measure of stock market riskiness (Baker and Wurgler, 2006) is found to be a better predictor than the Volatility Index (VIX) and the Put-to-Call Ratio (PCR). The cross-country comparison results confirms the literature findings that the link between sentiment and stock market returns varies across indices and cultures, as the predictive power of the variable appears strongest in the French and U.S. indices.

This dissertation consists of three distinct essays. The first essay investigates the risk interpretation of the investment premium by empirically examining the fundamental view versus the sentimental view. Overall, the results show that financial factors are the dominant driver of investment returns and they control the negative relation between investment and stock return. In the second essay, I examine the impact of financial contagion resulting from four global financial crises based on analyses of the global value premium. Results show that equity markets become more integrated after financial crises that exhibit global effects but less integrated after crises that exhibit regional effects. Overall findings support the risk story of the global value premium. The third essay examines the joint dynamics of volume and volatility in the junk bond market during the 2007-2008 financial crisis. Using trading volume information as a proxy for changes in the information set available to investors when financial crises occur, I investigate the impact of the subprime crisis on the informational efficiency of the junk bond market. The overall results show that the crisis does not have an impact on the market efficiency of the junk bond market.

Chapter 1 - The effect of early and salient investment experiences on subsequent asset allocations: An experimental study. In this paper I examine the effect of early and salient experiences on asset allocation decisions using two experiments, and a third one as a robustness check. The first experiment assesses the impact of salient and early risky asset returns on subsequent investment decisions. The findings of the study show that subjects that experience a market bust early in the investment lifecycle invest less in risky assets compared to subjects that experience market booms, even when the asset return stream is identical over a twenty year investment period. In the second experiment I tried to isolate the saliency from the early timing of the boom and the bust effect, in order to examine which of the two matters the most. The results indicate that the “size” of a bust matters more than its timing. Results from the third experiment confirm the findings in experiments one and two. Chapter 2 - Revisiting the Stock Market Boom and Crash of 1927–1933. Did a speculative bubble cause the stock market crash of 1929? I study the price dynamics of 26 publicly traded companies in the New York Stock Exchange (NYSE) during the years 1927–1933 using daily data from the Wharton Research Data Service (WRDS) database and find evidence in support of a speculative bubble. Furthermore, evidence of high volatility in the volume of shares traded for these 26 companies strongly reinforces the hypothesis of a speculative bubble, as the standard deviation of the cyclical component of the number of shares traded increased significantly during the boom period and declined sharply after the crash. The transmission of price shocks took place from the prices of innovative companies to the prices of traditional companies. Companies in traditional sectors had their price peaks last, and were followers, suggesting financial contagion. These results are in line with the Kindleberger-Minsky hypothesis of technological displacement. Chapter 3 - A time series analysis on the endogeneity of financial cycles in five advanced countries: U.S., Germany, U.K., Japan, and France. The purpose of this study is to examine the connections between credit booms and asset price booms, in the U.S., Germany, U.K., Japan, and France with the use of the dataset assembled by (Schularick & Taylor, 2012). According to Minsky, and as explained by (Kindleberger & Aliber, 2011), financial booms may begin due to a technological displacement, that causes stock prices to be totally reassessed. The increase in the price of stocks causes credit to expand and the credit expansion further increases stock prices, leading to a self-fulfilling prophecy. We provide evidence in favor to Minsky’s hypothesis, something that contradicts the findings of (Schularick & Taylor, 2012).