Common Sentiment and Price Contagion

This paper investigates the informational role of prices in segmented markets which are shocked by a kind of common sentiment resulting from financial contagion. This common sentiment bridges the connection between prices learned by rational traders and thus can weaken the uncertainty from noise shock. The authors find that there exist comovement effect and crowding-out effect in information acquisition among different markets. These two effects capture financial contagion when markets experience large downward or upward tendency, which offers an explanation for market crisis to some extent.