European Central Bank publishes working paper linking investor sentiment to stronger European equity spillovers during COVID-19 and the Russia-Ukraine conflict

The European Central Bank has released Working Paper No 3050 examining how investor sentiment relates to cross-market connectedness in European equity returns and volatility before and during the COVID-19 pandemic and the Russia-Ukraine conflict. Using network-based connectedness measures for six European stock indices (Spain, France, Germany, Italy, the Netherlands and the UK) over 2011–2023, the authors find strong interconnectedness between returns and sentiment, alongside higher volatility spillovers during the COVID-19 and Russia-Ukraine crisis periods. Across the full sample, the average Total Connectedness Index is estimated at 68.65% for returns, 69.68% for realized volatility and 65.50% for sentiment, with return connectedness concentrated more in the short term and volatility and sentiment connectedness dominated by long-term dynamics. The analysis also highlights cross-country asymmetries, with the UK acting as the largest net transmitter of return spillovers on average (NET 14.31%) and Italy as a large net receiver (-36.73%). In sub-period results, connectedness rises during crisis windows, including a return TCI increase from 51.44% pre-crisis to 65.83% post-crisis and a sentiment TCI increase from 56.98% to 61.81%. A Baker et al. (2012)-style regression and quantile-on-quantile analysis link global European sentiment to return connectedness, with the paper reporting a negative linear relationship (OLS coefficient -0.041) that becomes positive at extreme sentiment levels. The paper does not represent the views of the ECB.