Understanding Investors’ Impact on Financial Markets: A Cross-Asset Study of Institutional Participation, Sentiment, and Market Bubbles Using Explosivity Tests and Wavelet Analysis

This thesis improves the general understanding of the impact of investors on market dynamics, particularly in the context of bubbles, through investor sentiment. It comprises three interrelated studies.
The first study investigates the role of institutional investors in bubble formation through a cross-market analysis of their participation and each market’s explosivity. It concludes that institutional investors are key agents of market explosivity. The second study assesses the impact of investor sentiment on asset returns using wavelet coherence analysis, confirming that sentiment exerts a more substantial effect on returns than vice versa. Notably, this relationship
varies across time, frequency scales and asset types. The final study contrasts the impact of investor sentiment as measured by both a sentiment index and attention during both explosive versus non-explosive periods. It concludes that the effect of sentiment direction weakens during explosivity, whereas the influence of attention strengthens. While aligning with past literature, the overall findings of this thesis further enrich it, providing a deeper understanding that assets of a similar nature exhibit comparable levels of explosivity and sensitivity to investor sentiment, with cryptocurrencies demonstrating the highest degree of responsiveness to both factors. The contribution of this thesis to the existing literature is multifaceted, with its most notable aspects being the investigation of the agents behind the formation of bubbles through a comprehensive market comparison, as well as its application of the frequency domain to investor
sentiment using Stocktwits data to uncover the direction and evaluate the magnitude, frequency, and temporal dimension of impact on assets as well as establishing its changing influence in and out of bubbles. Ultimately, the thesis underscores the critical importance of investor sentiment to practitioners and regulators alike, advocating for the imperative to promote the dissemination of accurate information. Furthermore, it is recommended that regulators not be apprehensive about the growing number of individual investors and that they regulate all assets with investor perception in mind.