Market Liquidity,Investor Sentiment And Asset Returns

Behavioral finance theory has confirmed that asset returns can be deviated from the intrinsic value by investor sentiment.According to Amihud(2002),returns are closely linked to market liquidity,and there exists liquidity premium in asset returns.Thus,asset returns will not only affected by investor sentiment but also by market liquidity.Studying of the relationship between these three can not only help us to know more about market movements of asset returns but also help investors,companies and government understand the inner link between these three.All of this can help to build more efficient and stable financial market conditions.In this paper,we construct investor sentiment index to study the interaction mechanism among investor sentiment,market liquidity and asset returns and how the former two affect the latter one by mediating effect.Based on that,empirical research was initiated to test whether investor sentiment can significantly affect current asset returns.When considering conductive media based on market liquidity,how investor sentiment and market liquidity affect asset returns respectively.And whether market liquidity can significantly affect the expected asset returns.When considering conductive media based on investor sentiment,how investor sentiment and market liquidity affect asset returns respectively.Between investor sentiment and market liquidity there is a mutual mechanism:On the one hand,investor sentiment changes because there are cognitive bias about the information they own,which makes an impact on assets transaction,then influences trading activities and leads to the change of market liquidity;On the other hand,market liquidity also can provide a platform for investors.Liquidity directly decides the complexity to trade assets,which affects market the judgement of market investors.Thus,investor sentiment can affect liquidity then affect assets return.In the meanwhile,market liquidity can also affect investor sentiment and affect assets return.They three affect each other and are closely related,but little research focuses on the connection,so this article will take them into consideration in the first time.The innovations lie in:(1)based on six single variables which comprehensively reflect investors sentiment,using the principal component analysis,constructs the investor sentiment index SENT;(2)using a mediation effect model for the first time,taking investor sentiment,market liquidity and asset returns into consideration to study how they affect each other in the conductive process.The results show:(1)the investor sentiment has significantly positive effect on assets return;(2)the market liquidity has significantly negative impact on assets return;(3)in the model where market liquidity as intermediary variable,investor sentiment has significant effect on asset returns;(4)in the model where investor sentiment as intermediary variables,market liquidity has significant effect on asset returns;(5)market liquidity and investor sentiment have significant promoting effect on each other.At the same time,the paper finally gives three suggestions:(1)the investors should fully learn finance knowledge to avoid blind investment,that caused by investor sentiment.(2)listed companies should be good examples,pursuing long-term development after IPO rather than short-term money-looping,actively increasing the liquidity of the company and the market.(3)the regulatory departments need to improve the system of IPO,delisting,and information disclosure to further optimize the investment environment,to coordinate investors and companies to increase market liquidity and stabilize sentiment in the market.