The role of investor sentiment in bank liquidity creation

Jin Cai, Michael S. Pagano and John Sedunov

Finance Research Letters, 2023, vol. 58, issue PD

Abstract: Using a comprehensive, forward-looking estimate of investor sentiment based on equity, option, and fixed income markets, we find that investor sentiment is positively related to bank liquidity creation, LC. As investors become more optimistic, both asset-based and off-balance sheet LC rise while liability-based LC decreases, which results in a net increase in LC. The effect is seen in large banks’ LC, while the impact on small banks’ LC is weaker. A channel analysis finds increases in sentiment and bank LC coincide with greater lending that is financed by liquidating cash and securities, as well as by relying on non-depository sources.

Keywords: Banks; Liquidity creation; Sentiment; Depository institutions (search for similar items in EconPapers)
JEL-codes: G18 G21 G40 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010358

DOI: 10.1016/j.frl.2023.104663

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