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The impact of investor sentiment fluctuations on stock market liquidity and volatility: Implications for market returns

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  • Zhou, Zhengnan

Abstract

This study examines how investor sentiment fluctuations influence stock market liquidity and volatility from 2011 to 2023 in China’s A-share market. This study reveals that investor sentiment significantly enhances market liquidity while reducing price volatility using propensity score matching and instrumental variable regressions. Mediation analysis reveals that these effects operate through financing constraints and agency costs, whereas moderation analyses indicate that institutional ownership and analyst forecast accuracy influence these relationships. These findings are strengthened by robustness checks accounting for heterogeneity in industry, region, and firm lifecycle. The results underscore the pivotal role of investor sentiment in shaping market stability and efficiency, providing valuable insights for policymakers and market participants who mitigate systemic risks and enhance market performance.

Suggested Citation

  • Zhou, Zhengnan, 2025. "The impact of investor sentiment fluctuations on stock market liquidity and volatility: Implications for market returns," Finance Research Letters, Elsevier, vol. 86(PF).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pf:s1544612325020252
    DOI: 10.1016/j.frl.2025.108771
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    References listed on IDEAS

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