Investor sentiment and evaporating liquidity during the financial crisis

Junmao Chiu, Huimin Chung, Keng Yu Ho, Chih Chiang Wu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 Scopus citations


This study examines how investor sentiment affected equity liquidity and trading behavior during the financial crisis of 2007–2008. Using intraday data on equity index and financial ETFs, we show significant asymmetric response to investor sentiment on quoted spread, market depth, asymmetric depth, and net buying pressure. We also document that funding constraints can further increase the asymmetric impact of investor sentiment on liquidity and trading behavior. Our results can be explained by the psychological bias of negativity and help investors and risk management practitioners comprehensively understand why and how the evaporation of liquidity accelerates during the financial crisis.

Original languageEnglish
Pages (from-to)21-36
Number of pages16
JournalInternational Review of Economics and Finance
StatePublished - 1 May 2018


  • Equity liquidity
  • Financial crisis
  • Funding constraints
  • Investor sentiment
  • Net buying pressure

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