An examination of liquidity and investor sentiment in financial markets
Creators: name: Drummond, Philip
Publisher: name: The Australian National University
Year: 2019

description: This thesis is comprised of three main chapters. The first chapter, "Asymmetric Liquidity Persistence", is based on a working paper co-authored with Jianxin Wang. In this paper, we identify a new autoregressive property of daily liquidity that contributes to sudden liquidity dry-ups. While liquidity is generally highly persistent, this persistence is conditional on past market states. Large negative returns cause liquidity persistence to initially decrease and then increase in the longer-run. We call this Asymmetric Liquidity Persistence (ALP). We show that ALP is present in both market-level and stock-level liquidity. We demonstrate that our ALP model can generate more accurate in-sample and out-of-sample liquidity estimations. According to the predictions of the Amihud (2002) liquidity premium model, our ALP model provides for a superior characterisation of the daily liquidity process. The second chapter is titled "Discretionary Trading Surrounding Anticipated Distraction Events: the Case of the FIFA World Cup". This chapter demonstrates how anticipated market-orthogonal events can induce discretionary trading. Following Ehrmann and Jansen (2017), this study uses FIFA World Cup matches that occur during trading hours as an exogenous shock to the opportunity cost of monitoring markets. World Cup football matches have an impact on contemporaneous trading and an asynchronous impact on the rest of the trading day. In particular, when World Cup matches occur in the middle of the trading day, there is an abnormally large amount of trading between market open and kick-off time. Dollar trading volume between 120 to 90 minutes before kick-off is 23.4% of a standard deviation higher than normal levels. This is due to a temporal substitution effect whereby traders submit their orders prior to kick-off in order to avoid trading during match time. During this pre-match period, markets exhibit greater liquidity, volatility and price discovery. During matches, markets exhibit reduced liquidity, volatility and price discovery. The extraordinary market conditions that occur on match days follow the theoretical predictions of the Admati and Pfleiderer (1988) discretionary trading model. The third chapter, "Sports Sentiment and Stock Returns: An Intra-day Study", builds upon the behavioural finance literature and in particular, the influential study of Edmans, Garcia, and Norli (2007). Edmans et al. (2007) demonstrate that sporting results can predict overnight stock returns. The authors attribute this to a sports sentiment effect. In this thesis chapter, I demonstrate that the Edmans et al. (2007) daily sentiment effect is still present in a more recent sample of stock market data. In addition, I utilise all FIFA World Cup matches that have occurred during trading hours since 1998 to determine that there is an analogous intra-day sentiment effect. Winning full-time outcomes are associated with positive abnormal stock returns for the remainder of the trading day. Moreover, unexpected victories and victories over traditional rivals have a significant and positive marginal impact on abnormal stock returns. Using trade and quote data, this study also documents abnormal order imbalance and quote revision activity surrounding half-time match outcomes. Evidence suggests that both liquidity takers and providers are influenced by investor sentiment. Small trades exhibit the greatest sentiment effects. Following the three main thesis chapters, I provide concluding remarks and discuss limitations and future research opportunities for each research project.