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

This paper studies the COVID-19 pandemic as an exogenous shock to investor uncertainty and examines the effects 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, investor sentiment, inattention rationales, and aggravated macroeconomics are excluded. Our findings also add to the discussions on the economic consequences of the COVID-19 pandemic on financial markets.