Analyst forecasting and market liquidity dynamics: A comparative analysis of U.S. and Chinese markets pre and post COVID-19

Abstract

This study investigates the influence of analyst forecasting on market liquidity and information efficiency within developed U.S. and emerging Chinese markets, both before and during the global COVID-19 pandemic. Market liquidity, a crucial aspect of financial market functioning, is assessed using key indicators, including Amihud’s liquidity, turnover and bid/ask spreads. The findings reveal notable disparities in analysts’ forecasts of market dynamics before and after the onset of the COVID-19 crisis. During the pre-COVID-19 period, our analysis confirms a statistically significant relationship between analyst forecasting and market liquidity. However, as the COVID-19 pandemic emerged and evolved, analysts’ forecasting impacts on market liquidity showed a diminishing trend. Furthermore, the effects of analyst forecasting vary across quantiles in the Chinese market. In the United States, buy-sell recommendations and various analyst forecasting variables were significant before the pandemic. These findings underscore the nuanced interplay between analysts’ forecasts and the market dynamics within the studied regions. Most notably, the U.S. and Chinese markets experienced decreased information efficiency during the COVID-19 crisis. This shift resulted in a notable decoupling of analysts’ forecasts from information efficiency during this period. These outcomes have significant implications for scholars and investors alike, enhancing their comprehension of market conditions and investor behaviour when confronted with heightened market stressors, such as the COVID-19 pandemic, which has disrupted international financial markets.