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

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.