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

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  • Kumari, Jyoti

Abstract

I investigate the relationship between the stock market liquidity and investors sentiment. The significance of the liquidity in asset pricing is well documented, but little attention is paid in the empirical literature to the effect of investors sentiment on variation in the liquidity. I construct irrational aggregate sentiment index (ASI) measure the institutional investors sentiment. The empirical findings suggest that the stock market is highly liquid when sentiment is bullish and vice versa. Using the non-linear conditional volatility framework and non-linear Granger causality, I show the significant role of investors sentiment in predicting the stock market liquidity. The past psychological biases and herding of investors are associated with the volatility of liquidity through the direct and indirect channels.

Suggested Citation

  • Kumari, Jyoti, 2019. "Investor sentiment and stock market liquidity: Evidence from an emerging economy," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 166-180.
    • Handle: RePEc:eee:beexfi:v:23:y:2019:i:c:p:166-180
    DOI: 10.1016/j.jbef.2019.07.002
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    More about this item

    Keywords

    Investors sentiment; Stock market liquidity; Irrational investors sentiment; Volatility; Non-linearity; India;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G1 - Financial Economics - - General Financial Markets
    • G4 - Financial Economics - - Behavioral Finance

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