Crisis sentiment and banks' stock price crash risk: A missing piece of the puzzle?

This study empirically examines whether the stock price crash risk of euro area banks is affected by crisis sentiment during the period 2004-2020. We introduce a diverse set of crisis sentiment aspects, including communication and investors' focus of attention to market wide sentiment. We employ quarter-bank level data and various measures for stock price crash risk and crisis sentiment, including text and Google-search based to market-based proxies. Our results reveal a positive and significant relationship between crisis sentiment and stock price crash risk, implying that higher crisis sentiment leads to a higher future stock price crash risk for the euro area banks. These findings highlight the importance of crisis sentiment as the "transmission mechanism" of stock price crash risk and have important policy implications for central bankers and regulators.