The Role of Investor Sentiment in Bank Liquidity Creation

17 Pages Posted: 9 Sep 2023

See all articles by Jin Cai

Jin Cai

Sacred Heart University

Michael S. Pagano

Villanova University - Villanova School of Business

John Sedunov

Villanova University - Department of Finance

Abstract

Using a comprehensive, forward-looking estimate of investor sentiment based on equity, option, and fixed income markets, we find that investor sentiment is positively related to bank liquidity creation, LC. As investors become more optimistic, both asset-based and off-balance sheet LC rise while liability-based LC decreases, which results in a net increase in LC. The effect is seen in large banks’ LC, while the impact on small banks’ LC is weaker. A channel analysis finds increases in sentiment and bank LC coincide with greater lending that is financed by liquidating cash and securities, as well as by relying on non-depository sources.

Keywords: Banks, Liquidity Creation, Sentiment, Depository Institutions

Suggested Citation

Cai, Jin and Pagano, Michael S. and Sedunov, John, The Role of Investor Sentiment in Bank Liquidity Creation. Available at SSRN: https://ssrn.com/abstract=4566541 or http://dx.doi.org/10.2139/ssrn.4566541

Jin Cai

Sacred Heart University ( email )

5151 Park Avenue
Fairfield, CT 06825
United States

Michael S. Pagano (Contact Author)

Villanova University - Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
(610) 519-4389 (Phone)

HOME PAGE: http://www90.homepage.villanova.edu/michael.pagano

John Sedunov

Villanova University - Department of Finance ( email )

800 Lancaster Ave.
Villanova, PA 19085
United States
610-519-4374 (Phone)

HOME PAGE: http://homepage.villanova.edu/john.sedunov/

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