Researchers used data from the Avon Longitudinal Study of Parents and Children (ALSPAC), also known as Children of the 90s, which recorded details on the health of thousands of children born in South West England. Children's nightmares were recorded and reported by parents.
The psychotic experiences interview was carried out with 6,796 children, with slightly more girls than boys.
Children reporting frequent nightmares before the age of 12 were three and a half times more likely to suffer from psychotic experiences in early adolescence. Having night terrors doubled the risk of these problems, including hallucinations, interrupted thoughts or delusions.
Children aged between 2 and 9 years old with persistent nightmares reported by parents had up to one and a half times increased risk of developing psychotic experiences.
Writing in the journal Sleep, the researchers conclude that: "These findings tentatively suggest that arousal and rapid eye movement forms of sleep disorder might be early indicators of susceptibility to psychotic experiences."
Other sleep problems, such as insomnia, didn’t appear to affect children's mental health later in life.
Parents: 'Don't worry'
Nightmares are very common among children and they tend to become less frequent as the child gets older.
"We certainly don't want to worry parents with this news; 3 in every 4 children experience nightmares at this young age," says study author Professor Dieter Wolke in a statement.
"However, nightmares over a prolonged period or bouts of night terrors that persist into adolescence can be an early indicator of something more significant in later life."
Reacting to the study finding in a statement, Lucie Russell, director of campaigns at the young people's mental health charity YoungMinds says: "This is a very important study because anything that we can do to promote early identification of signs of mental illness is vital to help the thousands of children that suffer. Early intervention is crucial to help avoid children suffering entrenched mental illness when they reach adulthood."
Another author of the study, Dr Helen Fisher of King's College London offers these tips for better sleep for children: "The best advice is to try to maintain a lifestyle that promotes healthy sleep hygiene for your child, by creating an environment that allows for the best possible quality of sleep. Diet is a key part of this, such as avoiding sugary drinks before bed, but at that young age we'd always recommend removing any affecting stimuli from the bedroom – be it television, video games or otherwise. That's the most practical change you can make."
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