Investor emotional biases and trading volume’s asymmetric response: A non-linear ARDL approach tested in S&P500 stock market

Abstract

This paper investigates the dynamic linkages between trading volume and investors sentiments for the S&P500 stock exchange. Two sentiment indicators are considered, the overconfidence and the net optimism-pessimism indicator. Non-linear dynamic approach, namely the asymmetric autoregressive distributed lag (NARDL) model is used to capture the long-term and short-term non-linear connections between the investor sentiment and the stock market liquidity. Empirical findings suggested an asymmetric long-term market liquidity reaction to investor sentiment. In the short-term, the stock market liquidity react rapidly and asymmetrically to changes in overconfidence sentiment, while the optimism and pessimism sentiment has insignificant short-term impact on trading volume.

Keywords:

• trading volume
• stock return
• overconfidence
• optimism-pessimism
• NARDL
• S&P500

JEL classification:

• G1

Public Interest Statement

Several studies have shown that investors anticipate the future return evolution based on their feeling and they respond according to their expectations. They react aggressively or diminish their trading depending on whether they anticipate an increase or a decrease in future returns. However, these studies didn’t show whether the stock market liquidity reacts asymmetrically to investor’s over and under-confidence sentiment. Also, we are not sure that the impact of optimism and pessimism sentiment on stock market liquidity is asymmetric. In this study, we verify whether there’s an asymmetric relationship between investor sentiment and stock market liquidity when investors are more or less over (under) confident and when they are upper-optimistic or upper-pessimistic. We use the NARDL approach to examine this relation in S&P500 stock market.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Abderrazak Dhaoui

Abderrazak Dhaoui is an assistant professor in finance at the Faculty of Economic Sciences and Management of Sousse (Tunisia). He is has carried out several research and articles focusing on the liquidity of the market, the sensitivity of stock prices to changes in oil price, to investor’s psychological traits, to political crises.

Sami Bacha

Sami Bacha is an assistant professor in accounting and finance since 1998. He teaches market finance and corporate finance in several universities in France and Tunisia. Sami is a member of a research group that focuses on finance and cognitive governance and their impact on manager’s and investor decisions. Sami has occupied several positions at the university (internship director, Master coordinator). He is a consultant to several companies and credit institutions.