Investor Sentiment and Market-Wide Liquidity Pricing

Soumaya Yaakoubi

Journal of Behavioral Finance, 2024, vol. 25, issue 2, 229-243

Abstract: The recent asset pricing evidence on the return-liquidity risk relationship is mixed and somewhat ambiguous. We reevaluate the importance of market-wide liquidity and liquidity risk for equity pricing by taking the role of investor sentiment into account. Regarding the market-wide liquidity level as a systematic factor, we find that high market sentiment tends to weaken the effect of market-wide illiquidity - both expected and unexpected - on stocks returns. With respect to systematic liquidity exposure as a priced risk factor, the results show that the effect of exposure to shocks in aggregate liquidity on expected returns is significantly positive when sentiment is low, while it is significantly negative when sentiment is high suggesting that “rational” asset pricing is only valid in the low sentiment regime without too much turbulence caused by sentiment traders.

Date: 2024
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/15427560.2022.2100379 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:hbhfxx:v:25:y:2024:i:2:p:229-243

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/hbhf20

DOI: 10.1080/15427560.2022.2100379

Access Statistics for this article

Journal of Behavioral Finance is currently edited by Brian Bruce

More articles in Journal of Behavioral Finance from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().