The relationship between investors sentiment and stock liquidity

This paper empirically investigates the relation of investors' sentiment and stock liquidity. Particularly, this research explores whether investors' sentiment is related to stock liquidity and whether the level of individual trading and information environment in each firm affects the relation. Three hypotheses were drawn and tested. To test the hypotheses, stock prices and relevant data of firms listed on Korea Exchange(KRX) were put together, and the hypotheses were studied by panel and Fama-MacBeth regressions. This research discovers that investor sentiment has positive effects on stock liquidity. Further, this study finds that the level of individual trading and the level of information environment increases the positive relation between investors' sentiment and stock liquidity. This work finds individual trading and information has a certain role in the relationship between investors sentiment and stock liquidity. The findings suggest that increased investor sentiment may cause noise trading to increase. In addition, firms with more uninformed trading may have a more liquid stock market.