Stock Price Reactions to Wire News from the European Central Bank: Evidence from Changes in the Sentiment Tone and International Market Indexes

Abstract

This paper examines the link between changes in the sentiment tone with respect to the European Central Bank’s (ECB) announcements and stock returns. The analysis constructs a new index that describes the tone of the sentiment derived from these announcements, spanning the period January 2002 to June 2016. The novelty of this work relies on the development of a unique sentiment index associated with the messages conveyed by the ECB’s activities and the effect of this index on both the mean and the volatility of certain major international stock markets. In this context, the sentiment index is present in both the conditional mean and the volatility equations. The findings indicate a significant impact on both the mean and the volatility of returns, whereas the news sentiment/stock returns association increases in strength during the crisis period. The findings survive a robustness check based on the characteristics of the ECB governor’s personality.