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Daily investor sentiment, order flow imbalance and stock liquidity: evidence from the Chinese stock market

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  • Haiyuan Yin
  • Xingying Wu
  • Sophie X Kong

Abstract

We examine whether and how investor sentiment affects stock liquidity in the Chinese stock market. Utilizing big data mining techniques, we excavate posted texts of a large stock forum and devise daily investor sentiment indicators. While examining the relationship between investor sentiment and stock liquidity, we also test whether order flow imbalance, attributed to investor sentiment, is the channel where investor sentiment delivers its impact on stock liquidity. We find that investor sentiment correlates positively with stock liquidity, and order flow imbalance is proven as an intermediary in this process. This positive correlation is stronger in a bear market than in a bull one. Additionally, liquidity sensitivity is higher for firms with higher book‐to‐market ratio, larger size and lower risk. When the market is less regulated, such as relaxed short‐selling restrictions, liquidity sensitivity also rises.

Suggested Citation

  • Haiyuan Yin & Xingying Wu & Sophie X Kong, 2022. "Daily investor sentiment, order flow imbalance and stock liquidity: evidence from the Chinese stock market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(4), pages 4816-4836, October.
    • Handle: RePEc:wly:ijfiec:v:27:y:2022:i:4:p:4816-4836
    DOI: 10.1002/ijfe.2402
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    References listed on IDEAS

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    1. Fiorillo, Paolo & Meles, Antonio & Pellegrino, Luigi Raffaele & Verdoliva, Vincenzo, 2023. "Geopolitical risk and stock liquidity," Finance Research Letters, Elsevier, vol. 54(C).

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