Fear Sentiment, Liquidity, and Trading Behavior: Evidence from the Index ETF Market

Junmao Chiu (), Huimin Chung () and Keng-Yu Ho ()
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Junmao Chiu: College of Management, Yuan Ze University, 135 Yuan-Tung Road, Chung-Li, Taoyuan 32003, Taiwan
Huimin Chung: Graduate Institute of Finance, National Chiao Tung University, 1001 Ta-Hsueh Road, Hsinchu 30050, Taiwan
Keng-Yu Ho: Department of Finance, National Taiwan University, 1, Sec. 4, Roosevelt Road, Taipei 10617, Taiwan

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2014, vol. 17, issue 03, 1-25

Abstract: This paper explores how the fearful market-based sentiment indicators affect investor trading behavior and market liquidity. Our results show that a high degree of fearful market-based sentiment induces more sell orders along with a reduction in market liquidity, and vice versa. In addition, most of our findings suggest that the fear sentiment, in the case of extremely high implied volatility, decreases net buying volume more significantly. As for the interaction between fearful market-based sentiment and institutional investor expectation, we show that net buying volume and market liquidity decrease (increase) more significantly than they normally do when the fearful market-based sentiment increases (decreases) in the state of bearish institutional investor expectation. The results provide support to the myopic loss aversion of investors.

Keywords: Fearful market-based sentiment; net buying volume; equity liquidity; index ETF market; JEL Classification: G10; JEL Classification: G11; JEL Classification: G14 (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (6)

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DOI: 10.1142/S0219091514500179

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