The sound of shocks: Does the market sentiment react to Economic Policy Uncertainty, energy prices and ESG shocks?

This paper examines the reaction of Market Sentiment to Economic Policy Uncertainty (EPU), energy prices and ESG shocks in the United States. Using monthly data from November 2002 to March 2025, we employ a simple recursive Structural Vector Autoregression (SVAR) model, complemented by the Climate Policy Uncertainty index as the exogenous variable for robust identification. Our findings reveal that EPU shocks significantly increase financial market volatility and dampen ESG sentiment over the medium term. The demand-driven shock from energy prices reduces financial volatility and ESG uncertainty. The Historical Decomposition highlights a shift in systemic drivers post-pandemic, with EPU emerging as the dominant source of financial and sustainability-related sentiment shifts. These findings underscore the evolving channels through which macroeconomic instability shapes investor behavior and sustainability expectations.