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News tone, investor sentiment, and liquidity premium

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  • Liu, Jun
  • Wu, Kai
  • Zhou, Ming

Abstract

Investor sentiment affects stock market liquidity by affecting noise trading and irrational market makers. Previous studies have focused on this effect with the time-series variation in sentiment and liquidity. This paper utilizes firm-specific news sentiment (FSNS) to examine its effect on stock liquidity in China stock market and show that firms with an optimistic tone cause a rise in trading activity while decreasing price impact and transaction cost. We also find that pessimistic stocks exhibit a stronger predictive effect on stock returns than optimistic stocks. After decomposing liquidity into non-sentiment-driven components, we find that the liquidity premium is declining but remains significant. This declining pattern indicates that FSNS contributes to explaining the liquidity premium. We also show that monetary policy uncertainty, growth of margin trading, and institutional ownership are the underlying mechanisms driving the predictability of stock liquidity.

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  • Liu, Jun & Wu, Kai & Zhou, Ming, 2023. "News tone, investor sentiment, and liquidity premium," International Review of Economics & Finance, Elsevier, vol. 84(C), pages 167-181.
    • Handle: RePEc:eee:reveco:v:84:y:2023:i:c:p:167-181
    DOI: 10.1016/j.iref.2022.11.016
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    1. Chen, Yugang & Lu, Jihua & Ma, Weidong & Kumar, Satish & Shahab, Yasir, 2024. "Dispersion in news sentiment and M&As outcomes," Research in International Business and Finance, Elsevier, vol. 71(C).

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    More about this item

    Keywords

    Investor sentiment; Liquidity; Liquidity premium;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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