Uncertain policies, emotional markets: How policy uncertainty shapes the effect of investor sentiment on prices
Keywords:
Investor sentiment, Market prices, Economic policy uncertainty, Fear and greed index, Behavioral financeAbstract
This study examines the effect of investor sentiment on market prices with Economic Policy Uncertainty as a moderating variable, using monthly data from January 2009 to September 2025. Sentiment is measured using the Fear and Greed Index, while EPU is represented by the global index developed by Baker et al. The analysis employs Hayes PROCESS Model 1 to test the moderating effect. The results indicate that sentiment has a positive and significant impact on market prices, confirming that investors’ collective perceptions and emotions are key drivers in price formation. Although EPU does not exhibit a significant direct effect, the interaction analysis and conditional effects reveal that policy uncertainty strengthens the relationship between sentiment and prices. The influence of sentiment increases consistently across low, medium, and high levels of EPU, with the greatest effect observed under the highest uncertainty. These findings suggest that the effect of sentiment is state-dependent and becomes more dominant under unstable policy conditions. This study contributes to the literature by emphasizing that understanding market price dynamics requires simultaneous consideration of psychological factors and policy uncertainty, and offers important implications for regulators and market participants in monitoring risks arising from sentiment.
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