The impact of COVID-19 news and investor sentiment in European stock pricing, a regional, country, and economic sector review

Authors

  • Oscar V. De la Torre-Torres Universidade Estadual de Michoacán -UMSNH-Morelia
  • Dora Aguilasocho-Montoya Universidade Estadual de Michoacán -UMSNH-Morelia
  • Leticia Bollain-Parra Saint Nicholas and Hidalgo’s, Michoacán State University (UMSNH) Morelia, México
  • Amador Durán-Sánchez Departamento de Economia Financeira e Contabilidade, Universidade de Extremadura

DOI:

https://doi.org/10.59072/rper.vi60.69

Keywords:

investor sentiment, European stock pricing, economic sector, COVID-19

Abstract

In the present paper we extended the Fama-French (FF), three-factor model, by including the U.S. VIX and European VSTOXX implied volatility indexes. Also, the Baker, Bloom Davis, Kost, and Renault Economic policy (WEUI), pandemics (WPUI) news, and social media (TWITUI) uncertainty index were included. We did this in order to test if, the main Eastern, Northern, Southern, and Western European stock markets could be priced with behavioral biases such as investor sentiment. With a balanced panel data of 659 European companies from January 2017 to Jun 2021, we found that the WPUI could be used in a regional perspective, along with the VIX and TWITUI factors. In a country-specific perspective, only the inclusion of the TWITUI factor led to better-fitting results in Finland, Ireland, the Netherlands, Poland, Spain, and Sweden. Our results suggest that other pandemic news sentiment indexes should be developed and used in the main European stock markets and encourage the use of social media investor sentiment proxies in risk and asset-pricing multifactor models.

References

Ahmed, F., Syed, A. A., Kamal, M. A., López-García, M. de las N., Ramos-Requena, J. P., & Gupta, S. (2021). Assessing the Impact of COVID-19 Pandemic on the Stock and Commodity Markets Perfor- mance and Sustainability: A Comparative Analysis of South Asian Countries. Sustainability 2021, Vol. 13, Page 5669, 13(10), 5669. https://doi.org/10.3390/SU13105669

Ang, A., Hodrick, R. J., Xing, Y., & Zhang, X. (2006). The cross-section of volatility and expected returns. Journal of Finance, 61(1), 259–299. https://doi.org/10.1111/J.1540-6261.2006.00836.X

Apergis, N., & Pragidis, I. (2019). Stock Price Reactions to Wire News from the European Central Bank: Evidence from Changes in the Sentiment Tone and International Market Indexes. International Advances in Economic Research 2019 25:1, 25(1), 91–112. https://doi.org/10.1007/S11294-019-09721- Y

Aydogan, B. (2016). Sentiment dynamics and volatility of international stock markets. Eurasian Business Review 2016 7:3, 7(3), 407–419. https://doi.org/10.1007/S40821-016-0063-3

Bai, Y. (2014). Cross-border sentiment: an empirical analysis on EU stock markets. Http://Dx.Doi.Org/10.1080/09603107.2013.864035, 24(4), 259–290.

https://doi.org/10.1080/09603107.2013.864035

Baker, M., & Wurgler, J. (2006). Investor sentiment and the cross-section of stock returns. Journal of Finance, 61(4), 1645–1680. https://doi.org/10.1111/j.1540-6261.2006.00885.x

Baker, M., & Wurgler, J. (2007). Investor sentiment in the stock market. Journal of Economic Per- spectives, 21(2), 129–151. https://doi.org/10.1257/jep.21.2.129

Baker, S., Bloom, N., Davis, S. J., & Kost, K. J. (2019). Policy news and stock market volatility (No. 25720; NBER Working Paper Series). http://www.policyuncertainty.com/EMV_monthly.html

Baker, S. R., Bloom, N., & Davis, S. J. (2016a). Economic Policy Uncertainty Index. Economic Policy Uncertainty. https://www.policyuncertainty.com/index.html

Baker, S. R., Bloom, N., & Davis, S. J. (2016b). Measuring Economic Policy Uncertainty. The Quar- terly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024

Baker, S. R., Bloom, N., Davis, S. J., & Kost, K. (2019). Daily infectious disease equity market volatility tracker. Economic Policy Uncertainty. https://www.policyuncertainty.com/infec- tious_EMV.html

Baker, S. R., Bloom, N., Davis, S. J., & Renault, T. (2021). Twitter-Derived Measures of Economic Uncertainty. http://www.policyuncertainty.com/media/Twitter_Uncertainty_5_13_2021.pdf

Barberis, N., & Thaler, R. (2005). A Survey of Behavioral Finance. In Advances in Behavioral Fi- nance, Volume II (pp. 1–76). Princeton University Press. https://doi.org/10.1515/9781400829125- 004/HTML

Barberis, N., Thaler, R., Brunnermeier, M., Constantinides, G., Daniel, K., Harris, M., Huang, M., Lamont, O., Ritter, J., Shleifer, A., Stein, J., & Vuolteenaho, T. (2002). NBER WORKING PAPER SE- RIES A SURVEY OF BEHAVIORAL FINANCE. http://www.nber.org/papers/w9222

Black, F. (1972). Capital Market Equilibrium with Restricted Borrowing. The Journal of Business, 45(3), 444–455.

Black, F. (1986). Noise. The Journal of Finance, 41(3), 529–543. https://doi.org/10.1111/J.1540- 6261.1986.TB04513.X

Black, F., & Scholes, M. (1973). The Pricing of Options and Corporate Liabilities. The Journal of Political Economy, 81(3), 637–654.

Carhart, M. M. (1997). On Persistence in Mutual Fund Performance. The Journal of Finance, LII(1), 57–82.

Castro, J. A. M., & López Herrera, F. (2021). Probabilidad de ganancias cambiarias, inversión de largo plazo y deuda en moneda extranjera, antes y durante el brote de Covid-19: un análisis de empresas mexicanas. Contaduría y Administración, 65(5), 221. https://doi.org/10.22201/fca.24488410e.2020.3092

Croissant, Y., & Millo, G. (2008). Panel data econometrics in R: The plm package. Journal of Sta- tistical Software, 27(2), 1–43. https://doi.org/10.18637/jss.v027.i02

Da, Z., Engelberg, J., & Gao, P. (2015). The Sum of All FEARS Investor Sentiment and Asset Prices. Review of Financial Studies, 28(1), 1–32. https://doi.org/10.1093/rfs/hhu072

de Long, J. B., Shleifer, A., Summers, L. H., & Waldmann, R. J. (1990). Noise Trader Risk in Fi- nancial Markets. Journal of Political Economy, 98(4), 703–738. https://doi.org/10.1086/261703

Durand, R. B., Lim, D., & Zumwalt, J. K. (2011). Fear and the Fama-French Factors. Financial Management, 40(2), 409–426. https://doi.org/10.1111/J.1755-053X.2011.01147.X

Duttilo, P., Gattone, S. A., & Battista, T. di. (2021). Volatility Modeling: An Overview of Equity Markets in the Euro Area during COVID-19 Pandemic. Mathematics 2021, Vol. 9, Page 1212, 9(11), 1212. https://doi.org/10.3390/MATH9111212

Fama, E. (1965). The behavior of stock-market prices. Journal of Business, 38(1), 34–105.

Fama, E. F., & French, K. R. (1996). Multifactor Explanations of Asset Pricing Anomalies; Multi- factor Explanations of Asset Pricing Anomalies. THE JOURNAL OF FINANCE, LI(1). https://doi.org/10.1111/j.1540-6261.1996.tb05202.x

Fisher, K. L., & Statman, M. (2000). Investor Sentiment and Stock Returns. Financial Analysts Jour- nal, 56(2), 16–23. https://doi.org/10.2469/FAJ.V56.N2.2340

Frugier, A. (2016). Returns, volatility and investor sentiment: Evidence from European stock mar- kets. Research in International Business and Finance, 38, 45–55. https://doi.org/10.1016/J.RIBAF.2016.03.007

Grauer, R. R., & Roll, R. (2001). Asset Pricing Theory and Tests. November.

Griffith, J., Najand, M., & Shen, J. (2020). Emotions in the Stock Market. Journal of Behavioral Finance, 21(1), 42–56. https://doi.org/10.1080/15427560.2019.1588275

Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46(6), 1251–1271. https://doi.org/10.2307/1913827

Iqbal, N., Manzoor, M. S., & Bhatti, M. I. (2021). Asymmetry and Leverage with News Impact Curve Perspective in Australian Stock Returns’ Volatility during COVID-19. Journal of Risk and Financial Management 2021, Vol. 14, Page 314, 14(7), 314. https://doi.org/10.3390/JRFM14070314

Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econo- metrika, 47, 263-291. Econometrica, 47(2), 263–292. https://doi.org/10.2307/1914185

Keynes, J. M. (1936). The General Theory of Employment, Interest, and Money. Palgrave McMillan. https://doi.org/10.1007/978-3-319-70344-2

Lintner, J. (1965). The valuation of risk assets and the selection of risky investments in stock portfo- lios and capital budgets. The Review of Economics and Statistics, 47(1), 13–37.

Martínez Preece, M. D. R., & Zubieta Badillo, C. (2020). Impacto de la crisis económica por COVID- 19 en el sistema de pensiones mexicano y perspectivas ante el proyecto de su reforma. Contaduría y Administración, 65(5), 222. https://doi.org/10.22201/fca.24488410e.2020.3101

Mehra, R., & Prescott, E. C. (1985). THE EQUITY PREMIUM A Puzzle. In Journal of Monetary Economics (Vol. 15).

Merton, R. (1969). Lifetime Portfolio Selection Under Uncertainty: The Continuous-Time Case. Re- view of Economics and Statistics, 51(3), 247–257. https://doi.org/10.2307/1926560

Merton, R. (1987). A simple model of capital market equilibrium with incomplete information. Jour- nal of Finance, XLII(3), 483–510.

Merton, R. C. (1973). Theory of rational option pricing. Bell J Econ Manage Sci, 4(1), 141–183. https://doi.org/10.2307/3003143

Newey, W. K., & West, K. D. (1987). A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix. Econometrica, 55(3), 703–708.

Nikkinen, J., & Peltomäki, J. (2019). Crash Fears and Stock Market Effects: Evidence From Web Searches and Printed News Articles. Journal of Behavioral Finance, 21(2), 117–127. https://doi.org/10.1080/15427560.2019.1630125

Pan, W. F. (2020). Does Investor Sentiment Drive Stock Market Bubbles? Beware of Excessive Op- timism! Journal of Behavioral Finance, 21(1), 27–41. https://doi.org/10.1080/15427560.2019.1587764 Refinitiv. (2019). Refinitiv Indices. Indices from Refinitiv - Daily Performance Updates. http://online.refinitiv.com/indices/

Refinitiv. (2020, April 6). Refinitiv global equity indices index methodology. Refinitiv Indices. https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/global-equity-index- methodology.pdf

Refinitiv. (2021). Refinitiv Eikon. Thomson Refinitiv Eikon Login. https://eikon.thomsonreu- ters.com/index.html

Roll, R. (1977). A critique of the asset pricing theory’s tests Part I: On past and potential testability of the theory. Journal of Financial Economics, 4(2), 129–176.

Roll, R. (1978). Ambiguity when Performance is Measured by the Securities Market Line. The Jour- nal of Finance, 33(4), 1051–1069.

Roll, R., & Ross, S. A. (1994). On the Cross-sectional Relation between Expected Returns and Betas. The Journal of Finance, 49(1), 101–121.

Ross, S. (1976). Return, Risk and Arbitrage. In I. Friend & J. Bicksler (Eds.), Risk and Return in Finance (pp. 189–218). Ballinger.

Sharpe, W. (1963). A simplified model for portfolio analysis. Management Science, 9(2), 277–293. Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance, XIX(3), 425–442.

Siganos, A., Vagenas-Nanos, E., & Verwijmeren, P. (2014). Facebook’s daily sentiment and inter- national stock markets. Journal of Economic Behavior & Organization, 107(PB), 730–743. https://doi.org/10.1016/J.JEBO.2014.06.004

Smales, L. A. (2016a). The role of political uncertainty in Australian financial markets. Accounting & Finance, 56(2), 545–575. https://doi.org/10.1111/acfi.12107

Smales, L. A. (2016b). Time-varying relationship of news sentiment, implied volatility and stock returns. Applied Economics, 48(51), 4942–4960. https://doi.org/10.1080/00036846.2016.1167830

Smales, L. A. (2017a). Effect of investor fear on Australian financial markets. Applied Economics Letters, 24(16), 1148–1153. https://doi.org/10.1080/13504851.2016.1259744

Smales, L. A. (2017b). The importance of fear: investor sentiment and stock market returns. Applied Economics, 49(34), 3395–3421. https://doi.org/10.1080/00036846.2016.1259754

S&P Dow Jones indices. (2017). A practitioners guide to reading VIX. S&P Indices. http://www.cboe.com/assets/modules/microsite/vix/documents/SandP A Practitioners Guide to Reading VIX.pdf

Størdal, S., Lien, G., & Trømborg, E. (2021). Impacts of Infectious Disease Outbreaks on Firm Per- formance and Risk: The Forest Industries during the COVID-19 Pandemic. Journal of Risk and Finan- cial Management 2021, Vol. 14, Page 318, 14(7), 318. https://doi.org/10.3390/JRFM14070318

STOXX Quontigo. (2021). STOXX STRATEGY INDEX GUIDE. Index Guide. https://www.stoxx.com/document/Indices/Common/Indexguide/stoxx_strategy_guide.pdf

Swamy, P. A. V. B., & Arora, S. S. (1972). The Exact Finite Sample Properties of the Estimators of Coefficients in the Error Components Regression Models. Econometrica, 40(2), 261. https://doi.org/10.2307/1909405

Thomson-Reuters. (2012). Thomson Reuters Business Classification methodology. Thomson Reuters Busines Classification. https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodol- ogy/trbc-business-classifcation-methodology.pdf

Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Sci- ence, 211(4481), 453–458. https://doi.org/10.1126/SCIENCE.7455683

Uhl, M. W. (2014). Reuters Sentiment and Stock Returns. Journal of Behavioral Finance, 15(4), 287–298. https://doi.org/10.1080/15427560.2014.967852

Wang, C. (2001). Investor Sentiment and Return Predictability in Agricultural Futures Markets. Journal of Futures Markets, 21(10), 929–952. https://doi.org/10.1002/fut.2003

Wang, C. (2003). Investor sentiment, market timing, and futures returns. Applied Financial Econom- ics, 13(12), 891–898. https://doi.org/10.1080/0960310032000129653

Wang, W., & Park, H. (2021). How Vulnerable Are Financial Markets to COVID-19? A Compara- tive Study of the US and South Korea. Sustainability 2021, Vol. 13, Page 5587, 13(10), 5587. https://doi.org/10.3390/SU13105587

Wolff, A. F. (2013). Investor sentiment and stock prices in the subprime mortgage crisis. Applied Financial Economics, 23(16), 1301–1309. https://doi.org/10.1080/09603107.2013.804163

Wu, P.-C., Liu, S.-Y., & Chen, C.-Y. (2016). Re-examining risk premiums in the Fama–French model: The role of investor sentiment. North American Journal of Economics and Finance, 36, 154– 171. https://doi.org/10.1016/j.najef.2015.12.002

Zheng, Y. (2014). The linkage between aggregate stock market investor sentiment and commodity futures returns. Applied Financial Economics, 24(23), 1491–1513. https://doi.org/10.1080/09603107.2014.925073

Downloads

Published

24-01-2022

How to Cite

Torre-Torres , O. V. D. la, Aguilasocho-Montoya , D., Bollain-Parra, L., & Durán-Sánchez , A. . (2022). The impact of COVID-19 news and investor sentiment in European stock pricing, a regional, country, and economic sector review . RPER, (60), 165–177. https://doi.org/10.59072/rper.vi60.69

Issue

No. 60 (2022): Portuguese Review of Regional Studies

Section

Articles

License

Copyright (c) 2022 RPER

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Most read articles by the same author(s)