The impact of trading behavioral biases on market liquidity under different volatility levels: Evidence from the Chinese commodity futures market

Qingfu Liu, Yiuman Tse and Kaixin Zheng

The Financial Review, 2021, vol. 56, issue 4, 671-692

Abstract: This paper investigates a sample of 15 Chinese commodity futures to examine the impact of trading behavioral biases on market liquidity under different volatility levels. We construct a measure of shocks driven by news on market fundamentals to capture rational trading behavior and a measure of irrational trading behavior from excess skewness, excess kurtosis, and excess turnover. We find that herding causes deterioration in liquidity mainly by affecting order imbalance, whereas overtrading improves market liquidity by increasing market depth. The disposition effect is identified only when volatility is higher, after a distinction is made between up and down markets.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:bla:finrev:v:56:y:2021:i:4:p:671-692

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