IIMB Management Review (Sep 2021)

Monetary policy and liquidity: Does investor sentiment matter?

  • Byomakesh Debata,
  • Saumya Ranjan Dash,
  • Jitendra Mahakud

Journal volume & issue
Vol. 33, no. 3
pp. 257 – 277

Abstract

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We examine the relationship between monetary policy and liquidity effects at the macro (overall market) and micro (individual stocks) levels, using data from the Indian stock market. We also test the possible asymmetric effect of investor sentiment on the monetary policy – liquidity relationship. Results suggest strong predictability of monetary policy on liquidity at an aggregate market level and individual stock level. The effect of monetary policy on liquidity is stronger during low sentiment (pessimistic) periods as compared to high sentiment (optimistic) periods.

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