Geopolitical risk and the sentiment connectedness among European stock markets

Abstract

Purpose

This paper aims to investigate the sentiment connectedness among 10 European stock markets between January 2020 and July 2022, associating such connectedness with the level of the geopolitical risk index.

Design/methodology/approach

For this purpose, a time-varying parameter vector autoregressive connectedness framework is used.

Findings

Results show a high degree of sentiment connectedness. Overall, the sentiments of Portugal, France, the Netherlands, Spain, Germany and Italy are net transmitters of shocks while those of Poland, Sweden, Norway and Romania are net receivers. Additional evidence indicates that when geopolitical risks increase, the sentiment connectedness tends to decrease. However, the reverse holds under extremely high levels of geopolitical risks.

Originality/value

Overall, this study provides some significant contributions to the literature. First, to the best of the authors’ knowledge, this is among the first few studies to examine the dynamic connectedness among stock market sentiment across countries. This issue needs special consideration for European countries because of their close geographical distance and strong integration due to the European Union’s co-development strategies. Second, the association of sentiment connectedness with geopolitical risk is examined for the first time. This is even more meaningful in the context of growing geopolitical risks stemming from the Ukraine war, which could affect international financial markets.

Citation

Le, T.H., Luong, T.A., Morales Heredia, S., Le, T.T., Dong, L.P. and Nguyen, T.T. (2025), "Geopolitical risk and the sentiment connectedness among European stock markets", Journal of Financial Economic Policy, Vol. 17 No. 2, pp. 157-179. https://doi.org/10.1108/JFEP-11-2023-0315