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Emotional Contagion and Financial Markets: The Interplay of Fear, Greed, and Herding
Abstract
The study investigates the complex dynamics that drive market overreaction in financial markets. This research focuses on the impact of emotional states (fear and greed), market news and rumors, peer influence, market volatility, and investor experience on market overreaction. The study employs the concepts of emotional contagion as a mediating variable and social proof as a moderating variable to understand how these factors interact and influence market behaviour. The findings highlight the significant role of emotional states and social dynamics in driving market inefficiencies. Emotional contagion is shown to amplify the impact of fear and greed, market news and rumors, peer influence, and market volatility on market overreaction. Conversely, social proof moderates these relationships, often intensifying the effect of emotions and social influences on market behaviour. The study's results underscore the importance of considering psychological and social factors in financial market analysis and regulatory frameworks.
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