Stock market liquidity: Implication of local and global investor sentiment

Behavioral finance is a recent approach in financial markets that have appeared because of the complexities long faced by the traditional or neoclassical finance theory. This paper investigates the influence of investor sentiment and herding behaviour on stock market liquidity using an empirical study on the Egyptian Stock Market. We examine the direct impact of Egyptian investor sentiment on the Egyptian Stock Market liquidity. As well as the indirect impact of the Egyptian investor sentiment on the Egyptian Stock Market liquidity through the Egyptian investor herding behaviour. Therefore, the major contribution is filling the gap of indirect sentiment-liquidity impact conflict. We use the monthly data of the EGX30 index from January 2004 up to December 2018 for building up investor sentiment index, investor herding behaviour, and stock market liquidity measures. Moreover, we are using two additional types of data (closed-end mutual fund discounts and the equity open-end mutual fund flows) that represent major measures which are used to build up investor sentiment index ranging through the same time-series of the previously mentioned period of this paper. Additionally, we use four control variables for stock market liquidity, namely market volatility, excess market return, term spread, and lag of the dependent variable, considering that the fourth variable is also used for investor herding behaviour. Our result shows that the investor sentiment index has both a direct and indirect impact on stock market liquidity. In addition, regarding event study analysis’ results, there are different signs of the direct and indirect impacts and different correlations between the research variables throughout the four different events that differ completely from the usual signs and correlations of the theoretical background.

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Investor Sentiment and Stock Market Liquidity

SSRN Electronic Journal ◽

10.2139/ssrn.973860 ◽

2007 ◽

Cited By ~ 1

Author(s):

Shuming Liu

Keyword(s):

Stock Market ◽

Investor Sentiment ◽

Market Liquidity ◽

Stock Market Liquidity

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Impact of Investor Behavior and Stock Market Liquidity: Evidence from China

Entropy ◽

10.3390/e21111111 ◽

2019 ◽

Vol 21 (11) ◽

pp. 1111 ◽

Cited By ~ 1

Author(s):

Shulan Hu ◽

Meiling Zhong ◽

Yanli Cai

Keyword(s):

Stock Market ◽

Cognitive Ability ◽

Negative Impact ◽

Positive Impact ◽

Investor Sentiment ◽

Entropy Method ◽

Market Liquidity ◽

Investor Behavior ◽

Expected Returns ◽

Stock Market Liquidity

Investor behavior is one of the important factors that affects market liquidity. It is very interesting to find out how investor behavior affects stock market liquidity. The Investor sentiment changes and information cognitive ability affect not only their expected returns but also market liquidity through short-selling restrained market behavior. This paper gives a comprehensive index of investor sentiment based on the entropy method. According to the empirical analysis based on evidence from China, we obtain the following results: The investor sentiment has a positive impact on market liquidity; the development of margin trading has curbed the positive impact of investor sentiment on market liquidity; the information cognitive ability has a negative impact on market liquidity; the explosive information volume enhances the market liquidity in the bull, weakens the market liquidity in the bear, and has no significant impact while shocked.

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Investor sentiment and stock market liquidity: Evidence from an emerging economy

Journal of Behavioral and Experimental Finance ◽

10.1016/j.jbef.2019.07.002 ◽

2019 ◽

Vol 23 ◽

pp. 166-180 ◽

Cited By ~ 3

Author(s):

Jyoti Kumari

Keyword(s):

Stock Market ◽

Investor Sentiment ◽

Emerging Economy ◽

Market Liquidity ◽

Stock Market Liquidity

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Investor sentiment and liquidity in emerging stock markets

Journal of Economic and Administrative Sciences ◽

10.1108/jeas-11-2020-0198 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Dorra Messaoud ◽

Anis Ben Amar ◽

Younes Boujelbene

Keyword(s):

Stock Market ◽

Generalized Method Of Moments ◽

Investor Sentiment ◽

Market Liquidity ◽

Subprime Crisis ◽

Sample Period ◽

Noise Traders ◽

Content Type ◽

Market Makers ◽

Stock Market Liquidity

PurposeBehavioral finance and market microstructure studies suggest that the investor sentiment and liquidity are related. This paper aims to examine the aggregate sentiment–liquidity relationship in emerging markets (EMs) for both the sample period and crisis period. Then, it verifies this relationship, using the asymmetric sentiment.Design/methodology/approachThis study uses a sample consisting of stocks listed on the SSE Shanghai composite index (348 stocks), the JKSE (118 stocks), the IPC (14 stocks), the RTS (12 stocks), the WSE (106 stocks) and FTSE/JSE Africa (76 stocks). This is for the period ranging from February, 2002 until March, 2021 (230 monthly observations). We use the panel data and apply generalized method-of-moments (GMM) of dynamic panel estimators.FindingsThe empirical analysis shows the following results: first, it demonstrates a significant relationship between the aggregate investor sentiment and the stock market liquidity for the sample period and crisis one. Second, referring to the asymmetric sentiment, we have empirically given proof that the market is significantly more liquid in times of the optimistic sentiment than it is in times of the pessimistic sentiment. Third, using panel causality tests, we document a unidirectional causality between the investor sentiment and liquidity in a direct manner through the noise traders and the irrational market makers and also a bidirectional causality in an indirect channel.Practical implicationsThe results reported in this paper have implications for regulators and investors in EMs. Firstly, the study informs the regulators that the increases and decreases in the stock market liquidity are related to the investor sentiment, not financial shocks. We empirically evince that the traded value is higher in the crisis. Secondly, we inform insider traders and rational market makers that the persistence of increases in the trading activity in both quiet and turbulent times is associated with investor participants such as noise traders and irrational market makers.Originality/valueThe originality of this work lies in employing the asymmetric sentiment (optimistic/pessimistic) in order to denote the sentiment–liquidity relationship in EMs for the sample period and the 2007–2008 subprime crisis.

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