Research On The Influence Of Investor Sentiment On Market Liquidity

Liquidity,together with profitability and volatility,constitute the core research object of asset pricing.Compared to the understanding of market profitability and volatility,we know very little about the causes and mechanisms of market liquidity changes over time.In recent years,the impact of market liquidity and investor sentiment on the market has gradually increased.The short-term rapid rise of the A-share market in 2015 and the subsequent market crash were mainly driven by investor optimism and liquidity.The rapid decline in the market since 2018 is also related to the lack of market liquidity.The impact of investor sentiment and market liquidity on the stock market is self-evident.However,the existing literature on the discussion of liquidity and investor sentiment mostly focused on explaining market anomalies or the impact of liquidity and investor sentiment on market stability and bubbles,while the empirical research on the relationship between investor sentiment and market liquidity is relatively lacking and has no final conclusion.Because of these findings,this paper intends to explore whether the changes in stock market liquidity are related to investor sentiment through empirical analysis,and the difference between rational and irrational sentiments on market liquidity.We find that market liquidity contains more irrational sentiment information,and when irrational sentiment rise,market liquidity tends to increase;on the contrary,investor rational sentiment have no obvious explanatory power for market liquidity.Further research has found that when the market volume is controlled,the increase of irrational sentiment indicators can still increase market liquidity;the influence of investor sentiment on liquidity is not limited to increasing trading volume.When investor sentiment is high,price impact will also become smaller.Based on our research,we find that investors' irrational sentiment have a significant impact on market liquidity,and market liquidity changes have a significant impact on the stable development of the stock market.Our results are consistent with the market phenomena observed in recent years.Further,this paper combines the results of empirical analysis with market practice and proposes a number of policy recommendations that are conducive to the stable and healthy development of the stock market.In recent years,the large fluctuations in investor sentiment and liquidity during the period of large fluctuations in the stock market have had a certain negative impact on the stable and healthy development of the market.Market participants are more concerned about how to avoid the irrational sentiment of investors and stabilize market liquidity fluctuations.We combine the research conclusions with the market reality,and propose policy recommendations from four aspects: improving the proportion of institutional investors,reducing market intervention,strengthening the management of capital market expectations,and strengthening the Internet,especially mobile Internet information supervision.The main innovations and marginal contributions of this paper are as follows.In the past,the research on the stock market has focused more on market profitability and volatility,while the discussion on the causes and mechanisms of market liquidity change over time is relatively rare.This article explains the changes in market liquidity from the perspective of investor sentiment and enriches the discussion of liquidity.Also,this paper enriches the research on the influence of investor sentiment on market liquidity.Our findings suggest that the impact of investor sentiment on liquidity is not limited to increasing trading volume.When investor sentiment is high,the price impact will also be smaller.