Does Uncertainty Matter in Stock Liquidity? Evidence from the Covid-19 Pandemic

Abstract

This paper utilizes the COVID-19 pandemic as an exogenous shock to investor uncertainty and examines the effect of uncertainty on stock liquidity. Analyzing data from Chinese listed firms, we find that stock liquidity dries up significantly in response to an increase in uncertainty resulting from regional pandemic exposure. The underlying reason for the decline in stock liquidity during the pandemic is a combination of earnings and information uncertainty. Funding constraints, market panic, risk aversion, inattention rationales, and macroeconomics factors are considered in our study. Our findings corroborate the substantial impairing role of uncertainty on market efficiency, and also add to the discussions on the pandemic effect on financial markets.

Keywords: stock liquidity, investor uncertainty, COVID-19 pandemic, stock market