Does Noise Trading Affect Stock Liquidity? Empirical Evidence from China

This paper examine the impact of noise trading on stock liquidity in China. We construct a theoretical model including noise traders, rational traders, and insiders, and test the model using transaction data on individual stocks in the CSI-300 (China-Shanghai-Shenzhen-300-Stock Index) in 2020. We find that noise trading has a negative effect on stock liquidity. As evidenced by the transmission mechanism test, noise trading lowers stock liquidity by increasing stock price volatility. Furthermore, when there is a higher level of insider trading, noise trading has a greater negative impact on stock liquidity. Dividends, however, reduce noise trading, thereby boosting stock liquidity