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Title: Investor Sentiment and the Fragility of Liquidity
Keywords: Investor sentiment, liquidity, mutual fund flows
Issue Date: 22-May-2012
Citation: LIN CHUNMEI (2012-05-22). Investor Sentiment and the Fragility of Liquidity. ScholarBank@NUS Repository.
Abstract: This paper identifies investor sentiment as an important driving force in the amplification of liquidity shocks. Using a firm-level vector autoregression (VAR) framework, I find that investors? pessimistic sentiment amplifies the feedback effect between the tightening of funding constraints through mutual fund outflows and the stock market illiquidity. This finding stands up in the face of various controls for other factors that affect liquidity, alternative measures of stock market illiquidity and alternative proxies for investor sentiment. Furthermore, I find economically significant returns for liquidity provision during periods of pessimistic sentiment. Collectively, my findings support a role for investor sentiment in the formation of fragility in liquidity: a small funding shock to the investors? capital can lead to a large jump in stock illiquidity.
Appears in Collections:Ph.D Theses (Open)

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