The 1986-88 stock market: Investor sentiment or fundamentals?

Abstract

This paper tests the widely held proposition that investor sentiment contributed to the stock market crash of 1987. Using weekly data during the 1986–8 period and conventional measures of stock fundamentals, changes in fundamentals are found to have a statistically significant influence on the movement of stock prices. In addition, a much-discussed measure of investor sentiment is used to test the proposition that investor sentiment contributed to the stock market crash of 1987. However, insignificant results regarding the investor sentiment index suggest that either the recently proposed sentiment index is faulty or investor sentiment did not significantly influence stock prices in the period surrounding the 1987 crash.