Interactive Relationship Between Investor Sentiment and Institutional Quality on Stock Market Liquidity in Sub-Saharan Africa
Keywords:
Investor Sentiment; Institutional Quality; Macroeconomic Factors; Stock Market Liquidity; Sub-Saharan AfricaAbstract
This study examines the role of investor sentiment and institutional quality in shaping stock market liquidity in Sub-Saharan Africa (SSA). Building on prior literature emphasizing sentiment-driven market behavior and the moderating role of institutions, it explores how these factors jointly influence liquidity outcomes. The study adopts a dynamic panel approach, employing the Generalized Method of Moments (GMM) to analyze data from nine major SSA stock exchanges selected based on market capitalization, trading volume, and liquidity indicators. The results show that investor sentiment significantly enhances stock market liquidity (β = 0.22, p = 0.002), suggesting that higher investor optimism increases trading activity and reduces transaction costs. Institutional quality also exerts a strong positive influence (β = 0.30, p = 0.000), highlighting the importance of effective governance, regulatory efficiency, and institutional stability in promoting liquidity. In addition, macroeconomic conditions are important determinants: GDP growth positively affects liquidity (β = 0.12, p = 0.018), while inflation negatively impacts liquidity (β = −0.15, p = 0.014). Overall, the findings confirm that the interaction between investor sentiment and institutional quality plays a critical role in determining liquidity outcomes in SSA markets. The study provides empirical evidence and offers policy insights for enhancing market resilience.
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