Collective intelligence in financial markets : does consumer sentiment influence valuation of financial products?

Abstract

This paper examines the relationship between the public mood associated with the economies of Italy, Spain and Greece, and prices of Credit Default Swaps on sovereign bonds of aforementioned countries. The effect of the changes in the public mood was measured by Granger causality tests and linear regression models. A price change prediction model was built based on the CART technique. Results of the Granger tests suggest that constructed mood indices convey new and meaningful information about changes in CDS prices. Moreover, the extent to which this is true varies between countries. In the analyzed timeframe, public mood is a much better predictor for Spain than for Italy. Investigation of this difference revealed that there is a strong relationship between the mood associated with Spanish CDS and changes in the Italian CDS prices. This empirical evidence illustrates the spillover effect that troubles in one economy might have on another economy.