Investor sentiment and local bias in extreme circumstances: the case of the Blitz

Urquhart, A. ORCID: https://orcid.org/0000-0001-8834-4243 and Hudson, R. (2016) Investor sentiment and local bias in extreme circumstances: the case of the Blitz. Research in International Business and Finance, 36. pp. 340-350. ISSN 0275-5319 doi: 10.1016/j.ribaf.2015.09.010

Abstract/Summary

This paper treats the Blitz, the bombing of Britain during World War Two, as a natural experiment which can provide insights into the effects of investor sentiment on stock returns. The period of the Blitz is very interesting in that one of the world’s major financial centres was under regular and severe air attack, as were many other industrial and commercial centres. These conditions provide a unique opportunity to study both investor sentiment and local bias effects in extreme circumstances. We show that negative investor sentiment during the Blitz as a whole was not evident. However major bombings in London gener- ate negative investor sentiment on stock returns while major bombings outside of London generate no negative investor sentiment on stock returns, which is consistent with local bias effects.