Abstract
Investor behavior is one of the important factors that affects market liquidity. It is very interesting to find out how investor behavior affects stock market liquidity. The Investor sentiment changes and information cognitive ability affect not only their expected returns but also market liquidity through short-selling restrained market behavior. This paper gives a comprehensive index of investor sentiment based on the entropy method. According to the empirical analysis based on evidence from China, we obtain the following results: The investor sentiment has a positive impact on market liquidity; the development of margin trading has curbed the positive impact of investor sentiment on market liquidity; the information cognitive ability has a negative impact on market liquidity; the explosive information volume enhances the market liquidity in the bull, weakens the market liquidity in the bear, and has no significant impact while shocked.
Highlights
Market liquidity interacts with expected market returns and price fluctuations
This paper studied the impact of investor behavior on stock market liquidity from the perspective of investor sentiment, investor information cognitive ability, and short-selling-restrained market behavior
Based on the herd mentality, inertia trading [5] and the empirical analysis of weekly transaction data of China’s A-share market, the results showed that investor sentiment had a positive impact on market liquidity and that investor information cognitive ability had a negative impact
Summary
Market liquidity interacts with expected market returns and price fluctuations. Healthy market liquidity is the premise of a healthy and orderly development of the securities market. Behavioral finance theory studies the influence of investor sentiment, information cognitive ability, and expected returns on investment behaviors. Research on investor behavior and market liquidity mainly includes (1) analyzing factors affecting investor behavior and their impact on financial markets from the perspective of behavioral finance. Baker and Stein [18], and Baker and Wurgler [26] considered investor sentiment, market liquidity, and stock returns in a research framework, but without discussing how investor behavior affects market liquidity; Liu et al [14]. Analyzed the influence of investor behavior on market liquidity from investor sentiment, information cognition, and short-selling constraints. We consider the influencing factors of investor behavior, including: Investor sentiment, investor information cognition, and margin trading and short selling in the indicator system. We summarize the research results and propose suggestions
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