IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v58y2023ipds1544612323010358.html
   My bibliography  Save this article

The role of investor sentiment in bank liquidity creation

Author

Listed:
  • Cai, Jin
  • Pagano, Michael S.
  • Sedunov, John

Abstract

Using a comprehensive, forward-looking estimate of investor sentiment based on equity, option, and fixed income markets, we find that investor sentiment is positively related to bank liquidity creation, LC. As investors become more optimistic, both asset-based and off-balance sheet LC rise while liability-based LC decreases, which results in a net increase in LC. The effect is seen in large banks’ LC, while the impact on small banks’ LC is weaker. A channel analysis finds increases in sentiment and bank LC coincide with greater lending that is financed by liquidating cash and securities, as well as by relying on non-depository sources.

Suggested Citation

  • Cai, Jin & Pagano, Michael S. & Sedunov, John, 2023. "The role of investor sentiment in bank liquidity creation," Finance Research Letters, Elsevier, vol. 58(PD).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010358
    DOI: 10.1016/j.frl.2023.104663
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612323010358
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2023.104663?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," The Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
    2. Malcolm Baker & Jeffrey Wurgler, 2006. "Investor Sentiment and the Cross‐Section of Stock Returns," Journal of Finance, American Finance Association, vol. 61(4), pages 1645-1680, August.
    3. Acharya, Viral & Naqvi, Hassan, 2012. "The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle," Journal of Financial Economics, Elsevier, vol. 106(2), pages 349-366.
    4. Itamar Drechsler & Alexi Savov & Philipp Schnabl, 2017. "The Deposits Channel of Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1819-1876.
    5. Scott R. Baker & Nicholas Bloom & Steven J. Davis, 2016. "Measuring Economic Policy Uncertainty," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1593-1636.
    6. Can Gao & Ian W. R. Martin, 2021. "Volatility, Valuation Ratios, and Bubbles: An Empirical Measure of Market Sentiment," Journal of Finance, American Finance Association, vol. 76(6), pages 3211-3254, December.
    7. Chatterjee, Ujjal K., 2018. "Bank liquidity creation and recessions," Journal of Banking & Finance, Elsevier, vol. 90(C), pages 64-75.
    8. Si, Deng-Kui & Wan, Shen & Li, Xiao-Lin & Kong, Dongmin, 2022. "Economic policy uncertainty and shadow banking: Firm-level evidence from China," Research in International Business and Finance, Elsevier, vol. 63(C).
    9. Tian, Jing & Li, Haiwei & You, Pin, 2022. "Economic policy uncertainty, bank loan, and corporate innovation," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    10. Berger, Allen N. & Bouwman, Christa H.S. & Kick, Thomas & Schaeck, Klaus, 2016. "Bank liquidity creation following regulatory interventions and capital support," Journal of Financial Intermediation, Elsevier, vol. 26(C), pages 115-141.
    11. Berger, Allen N. & Bouwman, Christa H.S., 2017. "Bank liquidity creation, monetary policy, and financial crises," Journal of Financial Stability, Elsevier, vol. 30(C), pages 139-155.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Khoo, Joye & Zheng, Chen & Pathan, Shams, 2024. "The beneficial effect of common ownership: Evidence from bank liquidity creation," Journal of Banking & Finance, Elsevier, vol. 163(C).
    2. Lu, Yiming & Wang, Yu, 2023. "Bank liquidity hoarding and bank systemic risk: The moderating effect of economic policy uncertainty," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    3. Davydov, Denis & Vähämaa, Sami & Yasar, Sara, 2021. "Bank liquidity creation and systemic risk," Journal of Banking & Finance, Elsevier, vol. 123(C).
    4. Berger, Allen N. & Li, Xinming & Saheruddin, Herman & Zhao, Daxuan, 2024. "Government guarantees and bank liquidity creation around the world," Journal of Banking & Finance, Elsevier, vol. 158(C).
    5. Muhammad Umar & Muhammad Safdar Sial & Yan Xu, 2021. "What Are The Channels Through Which Bank Liquidity Creation Affects GDP? Evidence From an Emerging Country," SAGE Open, , vol. 11(2), pages 21582440211, June.
    6. Guo, Pin & Zhang, Cheng, 2023. "The impact of bank FinTech on liquidity creation: Evidence from China," Research in International Business and Finance, Elsevier, vol. 64(C).
    7. Ren, Meixu & Zhao, Jingmei & Ke, Konglin & Li, Yidong, 2023. "Bank homogeneity and risk-taking: Evidence from China," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 142-154.
    8. Pana, Elisabeta, 2023. "A bibliometric review of liquidity creation," Research in International Business and Finance, Elsevier, vol. 64(C).
    9. Anas Alaoui Mdaghri & Lahsen Oubdi, 2022. "Bank-Specific and Macroeconomic Determinants of Bank Liquidity Creation: Evidence from MENA Countries," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(2), pages 55-76.
    10. Dang, Van Dan & Huynh, Japan, 2022. "Bank funding, market power, and the bank liquidity creation channel of monetary policy," Research in International Business and Finance, Elsevier, vol. 59(C).
    11. André F. Silva, 2019. "Strategic Liquidity Mismatch and Financial Sector Stability," Finance and Economics Discussion Series 2019-082, Board of Governors of the Federal Reserve System (U.S.).
    12. Muhammad Saifuddin Khan, 2018. "The Role of Liquidity in Financial Intermediation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2018, January-A.
    13. Thomas Kick, 2022. "Interest rate shocks, competition and bank liquidity creation," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(4), pages 409-441, December.
    14. Berger, Allen N. & Guedhami, Omrane & Kim, Hugh H. & Li, Xinming, 2022. "Economic policy uncertainty and bank liquidity hoarding," Journal of Financial Intermediation, Elsevier, vol. 49(C).
    15. Kladakis, George & Chen, Lei & Bellos, Sotirios K., 2022. "Bank regulation, supervision and liquidity creation," Journal of International Money and Finance, Elsevier, vol. 124(C).
    16. Huang, Shu-Chun & Chen, Wei-Da & Chen, Yehning, 2018. "Bank liquidity creation and CEO optimism," Journal of Financial Intermediation, Elsevier, vol. 36(C), pages 101-117.
    17. Deng, Wei & Gao, Lei & Xing, Fei & Yang, Ming, 2023. "Economic policy uncertainty, bank deposits, and liability structure," Emerging Markets Review, Elsevier, vol. 55(C).
    18. Nguyen, Thach Vu Hong & Ahmed, Shamim & Chevapatrakul, Thanaset & Onali, Enrico, 2020. "Do stress tests affect bank liquidity creation?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    19. Zheng, Chen & (Wai Kong) Cheung, Adrian & Cronje, Tom, 2019. "The moderating role of capital on the relationship between bank liquidity creation and failure risk," Journal of Banking & Finance, Elsevier, vol. 108(C).
    20. Hao, Jing & Peng, Mengzu & He, Wenjia, 2023. "Digital finance development and bank liquidity creation," International Review of Financial Analysis, Elsevier, vol. 90(C).

    More about this item

    Keywords

    Banks; Liquidity creation; Sentiment; Depository institutions;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G40 - Financial Economics - - Behavioral Finance - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:58:y:2023:i:pd:s1544612323010358. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.