The Impact of Investor Sentiment and Herding Behavior on Stock Market Liquidity "An Empirical Study on the Egyptian Stock Exchange" (original) (raw)

2021, The Impact of Investor Sentiment and Herding Behavior on Stock Market Liquidity "An Empirical Study on the Egyptian Stock Exchange"

Behavioral finance is a new approach in financial markets that has emerged as a result of the complications long-faced by the traditional finance theory. This research investigates the impact of investor sentiment and herding behavior on stock market liquidity using an empirical study on the Egyptian Stock Market. The research addresses one of the up-to-date topics in finance that cannot be considered consumed or obsolete. It examines the direct impact of the Egyptian investor sentiment on the Egyptian Stock Market liquidity. It also examines the indirect impact of the Egyptian investor sentiment on the Egyptian Stock Market liquidity through the investor’s herding behavior Therefore, this research adds to the body of knowledge by investigating these effects in an emerging market-the Egyptian market. Its major contribution is filling the gap of indirect sentiment-liquidity impact conflict. Monthly data of the EGX30 index from January 2004 up to December 2018 were used in building up investor sentiment index, investor herding behavior, and stock market liquidity measures. Moreover, there are two additional types of data that represent key measures that are used to build up investor sentiment index for the same period of this research. These two measures are: the closed-end mutual fund discounts and the equity open-end mutual fund flows. Additionally, the researcher uses four control variables for stock market liquidity, namely market volatility, excess market return, term spread, and lag of the dependent variable, considering that the fourth variable is also used for investor herding behavior. The researcher uses the deductive approach taking into consideration two types of statistical techniques, namely Structural Equation Modeling (SEM) and event study. The event study employed in this study utilizes four major events which are: the September 2008 Global Financial Crisis, 25 January 2011 Revolution, 30 June 2013 Revolution, and November 2016 Egyptian Pound Floatation. The main findings of this research indicated that the investor sentiment index has both; a positive direct impact on stock market liquidity and a negative indirect one through the mediator variable-investor herding behavior. In addition, the findings of the event study show that there are different signs of the direct and indirect impacts and different levels of correlation between the research variables throughout the four different events which differ completely from the usual signs and correlations of the theoretical background. Keywords: Behavioral Finance; Investor Sentiment; Investor Herding Behavior; Stock Market Liquidity; Egypt; Structural Equation Modeling (SEM); Event Study; EGX30