IDEAS home Printed from https://ideas.repec.org/a/spr/endesu/v25y2023i10d10.1007_s10668-022-02513-1.html
   My bibliography  Save this article

The interrelationship of air quality, investor sentiment, and stock market liquidity: a review of China

Author

Listed:
  • Shuhong Wang

    (Shandong University of Finance and Economics)

  • Xiaojing Yi

    (Ocean University of China)

  • Malin Song

    (Anhui University of Finance and Economics)

Abstract

This study analyzes air quality as a factor affecting Chinese stock market liquidity through the transmission mechanism of investor sentiment. Monthly time-series data from 2014 to 2018 are selected to analyze the air quality index, investor sentiment index, and turnover rate. The static and dynamic relationships among air quality, investor sentiment, and stock market liquidity are investigated using a multiple linear regression model. The inverse effect of stock market liquidity on air quality is analyzed based on the results of impulse response functions, variance decomposition, and the environmental Kuznets curve theory. We find that air pollution can negatively affect investors. Therefore, when facing negative emotion, investors choose to react passively, which reduces stock market liquidity. Furthermore, we find that stock market liquidity and air quality have an inverted U-shaped relationship. Pursuing higher liquidity comes at the expense of the environment, which exacerbates air pollution, thereby causing obviously abnormal behavior and threatening economic development. Based on these findings, this study proposes regulations and economic methods to improve air quality. Other policy recommendations include strengthened investor financial literacy and information disclosure to deter feelings of negativity about air pollution, which would ultimately promote stock market liquidity and economic development.

Suggested Citation

  • Shuhong Wang & Xiaojing Yi & Malin Song, 2023. "The interrelationship of air quality, investor sentiment, and stock market liquidity: a review of China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(10), pages 10955-10973, October.
    • Handle: RePEc:spr:endesu:v:25:y:2023:i:10:d:10.1007_s10668-022-02513-1
    DOI: 10.1007/s10668-022-02513-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10668-022-02513-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10668-022-02513-1?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. Baker, Malcolm & Stein, Jeremy C., 2004. "Market liquidity as a sentiment indicator," Journal of Financial Markets, Elsevier, vol. 7(3), pages 271-299, June.
    2. Harrison Hong & José Scheinkman & Wei Xiong, 2006. "Asset Float and Speculative Bubbles," Journal of Finance, American Finance Association, vol. 61(3), pages 1073-1117, June.
    3. Apergis, Nicholas & Artikis, Panagiotis G. & Kyriazis, Dimitrios, 2015. "Does stock market liquidity explain real economic activity? New evidence from two large European stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 38(C), pages 42-64.
    4. Tao Chen, 2017. "Investor Attention and Global Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 18(3), pages 358-372, July.
    5. Ruan, Qingsong & Yang, Haiquan & Lv, Dayong & Zhang, Shuhua, 2018. "Cross-correlations between individual investor sentiment and Chinese stock market return: New perspective based on MF-DCCA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 503(C), pages 243-256.
    6. Siqi Zheng & Jianghao Wang & Cong Sun & Xiaonan Zhang & Matthew E. Kahn, 2019. "Air pollution lowers Chinese urbanites’ expressed happiness on social media," Nature Human Behaviour, Nature, vol. 3(3), pages 237-243, March.
    7. Levy, Tamir & Yagil, Joseph, 2011. "Air pollution and stock returns in the US," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 374-383, June.
    8. Singh, Sanjay Kumar & Chen, Jin & Del Giudice, Manlio & El-Kassar, Abdul-Nasser, 2019. "Environmental ethics, environmental performance, and competitive advantage: Role of environmental training," Technological Forecasting and Social Change, Elsevier, vol. 146(C), pages 203-211.
    9. Guo, Kun & Sun, Yi & Qian, Xin, 2017. "Can investor sentiment be used to predict the stock price? Dynamic analysis based on China stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 469(C), pages 390-396.
    10. Haiqiang Chen & Terence Tai-Leung Chong & Xin Duan, 2010. "A principal-component approach to measuring investor sentiment," Quantitative Finance, Taylor & Francis Journals, vol. 10(4), pages 339-347.
    11. Chen, Yi-Wen & Chou, Robin K. & Lin, Chu-Bin, 2019. "Investor sentiment, SEO market timing, and stock price performance," Journal of Empirical Finance, Elsevier, vol. 51(C), pages 28-43.
    12. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January.
    13. Switzer, Lorne N. & Picard, Alan, 2016. "Stock market liquidity and economic cycles: A non-linear approach," Economic Modelling, Elsevier, vol. 57(C), pages 106-119.
    14. Kumari, Jyoti, 2019. "Investor sentiment and stock market liquidity: Evidence from an emerging economy," Journal of Behavioral and Experimental Finance, Elsevier, vol. 23(C), pages 166-180.
    15. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2019. "Firm-specific investor sentiment and the stock market response to earnings news," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 221-240.
    16. Qadan, Mahmoud & Aharon, David Y., 2019. "Can investor sentiment predict the size premium?," International Review of Financial Analysis, Elsevier, vol. 63(C), pages 10-26.
    17. Jie Ren & Hang Dong & Balaji Padmanabhan & Jeffrey V. Nickerson, 2021. "How does social media sentiment impact mass media sentiment? A study of news in the financial markets," Journal of the Association for Information Science & Technology, Association for Information Science & Technology, vol. 72(9), pages 1183-1197, September.
    18. Flowers, Stephen & Meyer, Martin, 2020. "How can entrepreneurs benefit from user knowledge to create innovation in the digital services sector?," Journal of Business Research, Elsevier, vol. 119(C), pages 122-130.
    19. Abbasi, Faiza & Riaz, Khalid, 2016. "CO2 emissions and financial development in an emerging economy: An augmented VAR approach," Energy Policy, Elsevier, vol. 90(C), pages 102-114.
    20. Chordia, Tarun & Subrahmanyam, Avanidhar & Anshuman, V. Ravi, 2001. "Trading activity and expected stock returns," Journal of Financial Economics, Elsevier, vol. 59(1), pages 3-32, January.
    21. Nico Singer & Saskia Laser & Frank Dreher, 2013. "Published stock recommendations as investor sentiment in the near-term stock market," Empirical Economics, Springer, vol. 45(3), pages 1233-1249, December.
    22. Aouadi, Amal & Arouri, Mohamed & Teulon, Frédéric, 2013. "Investor attention and stock market activity: Evidence from France," Economic Modelling, Elsevier, vol. 35(C), pages 674-681.
    23. Debata, Byomakesh & Dash, Saumya Ranjan & Mahakud, Jitendra, 2018. "Investor sentiment and emerging stock market liquidity," Finance Research Letters, Elsevier, vol. 26(C), pages 15-31.
    24. Blau, Benjamin M., 2018. "Income inequality, poverty, and the liquidity of stock markets," Journal of Development Economics, Elsevier, vol. 130(C), pages 113-126.
    25. Ding, Rong & Zhou, Hang & Li, Yifan, 2020. "Social media, financial reporting opacity, and return comovement: Evidence from Seeking Alpha," Journal of Financial Markets, Elsevier, vol. 50(C).
    26. Singh, Sanjay Kumar, 2019. "Territoriality, task performance, and workplace deviance: Empirical evidence on role of knowledge hiding," Journal of Business Research, Elsevier, vol. 97(C), pages 10-19.
    27. Muhammad A. Cheema & Gilbert V. Nartea & Kenneth R. Szulczyk, 2018. "Cross-sectional and time-series momentum returns and market dynamics: evidence from Japan," Applied Economics, Taylor & Francis Journals, vol. 50(23), pages 2600-2612, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhang, Chunqiang & Hao, Dayu & Gao, Lu & Xia, Fan & Zhang, Linlang, 2024. "Do ESG ratings improve capital market trading activities?," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 195-210.

    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. Seok, Sang Ik & Cho, Hoon & Ryu, Doojin, 2021. "Stock Market’s responses to intraday investor sentiment," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    2. Dhoha Mellouli & Siwar Ellouz, 2023. "Determinants of IPO stock market liquidity in a small emerging economy," SN Business & Economics, Springer, vol. 3(9), pages 1-19, September.
    3. Karstanje, Dennis & Sojli, Elvira & Tham, Wing Wah & van der Wel, Michel, 2013. "Economic valuation of liquidity timing," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5073-5087.
    4. Seok, Sangik & Cho, Hoon & Ryu, Doojin, 2022. "Scheduled macroeconomic news announcements and intraday market sentiment," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    5. Arjoon, Vaalmikki & Bhatnagar, Chandra Shekhar & Ramlakhan, Prakash, 2020. "Herding in the Singapore stock Exchange," Journal of Economics and Business, Elsevier, vol. 109(C).
    6. Czauderna, Katrin & Riedel, Christoph & Wagner, Niklas, 2015. "Liquidity and conditional market returns: Evidence from German exchange traded funds," Economic Modelling, Elsevier, vol. 51(C), pages 454-459.
    7. Ben-Rephael, Azi & Kadan, Ohad & Wohl, Avi, 2008. "The diminishing liquidity premium," CFS Working Paper Series 2008/52, Center for Financial Studies (CFS).
    8. Goodell, John W. & Kumar, Satish & Li, Xiao & Pattnaik, Debidutta & Sharma, Anuj, 2022. "Foundations and research clusters in investor attention: Evidence from bibliometric and topic modelling analysis," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 511-529.
    9. 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.
    10. Pedro Manuel Nogueira Reis & Carlos Pinho, 2021. "A Reappraisal of the Causal Relationship between Sentiment Proxies and Stock Returns," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 22(4), pages 420-442, October.
    11. Beltratti, Andrea & Bortolotti, Bernardo & Caccavaio, Marianna, 2016. "Stock market efficiency in China: Evidence from the split-share reform," The Quarterly Review of Economics and Finance, Elsevier, vol. 60(C), pages 125-137.
    12. Liyun Zhou & Chunpeng Yang, 2020. "Investor sentiment, investor crowded-trade behavior, and limited arbitrage in the cross section of stock returns," Empirical Economics, Springer, vol. 59(1), pages 437-460, July.
    13. Wu, Qinqin & Hao, Ying & Lu, Jing, 2018. "Air pollution, stock returns, and trading activities in China," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 342-365.
    14. Damien KUNJAL, 2023. "The Role of Investor Attention in ETF Liquidity," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 7(2), pages 45-64.
    15. Tut, DANIEL, 2024. "Bitcoin, speculative sentiments and crypto-assets valuation," MPRA Paper 120866, University Library of Munich, Germany.
    16. Ince, Baris, 2022. "Liquidity components: Commonality in liquidity, underreaction, and equity returns," Journal of Financial Markets, Elsevier, vol. 60(C).
    17. Kim, Karam & Ryu, Doojin & Yang, Heejin, 2021. "Information uncertainty, investor sentiment, and analyst reports," International Review of Financial Analysis, Elsevier, vol. 77(C).
    18. Feng, Frank Yulin & Kang, Wenjin & Zhang, Huiping, 2023. "Liquidity shocks and the negative premium of liquidity volatility around the world," Journal of International Money and Finance, Elsevier, vol. 139(C).
    19. Camilleri, Silvio John & Galea, Francelle, 2019. "The Determinants of Securities Trading Activity: Evidence from four European Equity Markets," MPRA Paper 95298, University Library of Munich, Germany.
    20. Chen, Haozhi & Zhang, Yue, 2023. "Research on the effect of firm-specific investor sentiment on the idiosyncratic volatility anomaly: Evidence from the Chinese market," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).

    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:spr:endesu:v:25:y:2023:i:10:d:10.1007_s10668-022-02513-1. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.