How does trading volume respond to investor sentiment?
DOI:
https://doi.org/10.11606/issn.1982-6486.rco.2019.163596Keywords:
Investor sentiment, Stock market, Behavioral financeAbstract
Behavioral economics has broadened the understanding of stock market trading. Investors with different expectations of optimism (or pessimism) and confidence tend to trade differently over the short and long term. Moreover, their behavioral biases tend to be one of the underlying causes of nonlinearity and stock market asymmetry, a factor that hinders an accurate analysis of this relationship. Using a nonlinear approach to asymmetric autoregressive distributed delays, we analyzed in detail the short and long-term non-linear and asymmetric connections between investor sentiment and trading volume in the US market from 2004 to 2017. The results, besides confirming whereas behavioral biases influence declining turnover, indicate that trading volume reacts rapidly to the presence of lower confidence investors and that this relationship is deeply asymmetrical in the long run. From this evidence it is presumed that in times of low liquidity investor confidence declines and their risk aversion increases, and therefore they reduce their trading to avoid negative results.
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