News tone, investor sentiment, and liquidity premium

Jun Liu, Kai Wu and Ming Zhou

International Review of Economics & Finance, 2023, vol. 84, issue C, 167-181

Abstract: Investor sentiment affects stock market liquidity by affecting noise trading and irrational market makers. Previous studies have focused on this effect with the time-series variation in sentiment and liquidity. This paper utilizes firm-specific news sentiment (FSNS) to examine its effect on stock liquidity in China stock market and show that firms with an optimistic tone cause a rise in trading activity while decreasing price impact and transaction cost. We also find that pessimistic stocks exhibit a stronger predictive effect on stock returns than optimistic stocks. After decomposing liquidity into non-sentiment-driven components, we find that the liquidity premium is declining but remains significant. This declining pattern indicates that FSNS contributes to explaining the liquidity premium. We also show that monetary policy uncertainty, growth of margin trading, and institutional ownership are the underlying mechanisms driving the predictability of stock liquidity.

Keywords: Investor sentiment; Liquidity; Liquidity premium (search for similar items in EconPapers)
JEL-codes: G12 G14 G32 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056022002842
Full text for ScienceDirect subscribers only

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:eee:reveco:v:84:y:2023:i:c:p:167-181

DOI: 10.1016/j.iref.2022.11.016

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().