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Open Access Research Article

Granger causality and impulse response analysis of economic sentiment changes : Evidence from European price indices and the banking sector

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pp. 2651–2660Vol. 46Issue 8November 2025DOI: 10.47974/JIOS-2087XML
Received:
05 Feb 2025
Published Online:
29 Nov 2025
Article type:
Research Article
Language:
EN
Article no.:
JIOS-2087
Pages:
2651–2660

Abstract

The present study analyzes how sentiment indicators affect the European banking sector through their influence on sector-specific price indices. Focusing on the STOXX Europe 600, we test whether sentiment changes exert stronger effects on banking stocks than on the broader market. Using a dataset of 24 STOXX sector indices and two sentiment measures—the EC Economic Sentiment Indicator (ESI) and the BCG M&A Sentiment Index—we first apply Granger causality tests. The results confirm that sentiment significantly drives stock price movements across industries, warranting further focus on banks. We then employ an Impulse Response Function (IRF) analysis, demonstrating that the STOXX Europe 600 Banks Index (.SX7P) reacts more strongly and immediately to sentiment shocks than the general STOXX Index (.STOXX). This heightened sensitivity reflects banks’ leverage and regulatory exposure, which amplify sentiment-driven volatility. The findings highlight sentiment indices as predictive tools for market fluctuations, stressing their importance for investors, policymakers, and sector-specific risk management.

Keywords

Subject Classifications

91G1568T50

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