Impact of Narrative Bias and Market Liquidity on Stock Market Dynamics: Enhancing Predictive Accuracy of Share Prices

Gapat Parmeshwar Uttreshwar , Chaudhari Pradnya Shantaram , Atram Piyush Anil

Narrative Bias, Market Liquidity, Stock Price Prediction, Investor Sentiment, Behavioural Finance

Financial markets are not only driven by economic fundamentals, but also by psychological stories and market structure determinants that affect the decision-making process of investors. Studies conducted in Behavioural Finance theory indicate that investors tend to rely on current stories and opinions instead of making rational decisions. The present study is going to consider the effect of the combination of narrative bias and market liquidity on stock market processes and explore the potential of increasing prediction accuracy for shares by including these aspects into consideration. Narrative bias denotes the impact of the media story and social story on financial decision-making, whereas market liquidity implies ease of buying and selling shares without altering their price. With the help of sentiment analysis methods for determining narrative bias and liquidity measures like trading volumes and bid-ask spreads, this paper will establish a forecasting model for stock prices. The empirical study will be performed based on market data from different major stock exchanges, including the National Stock Exchange of India and the Bombay Stock Exchange. The regression and machine learning models will be employed to determine the connection between narrative bias, liquidity conditions, and stock price volatility. According to the results, it is evident that narrative bias plays an important role in determining investors' expectations and influences short-term stock price changes, whereas liquidity conditions have a significant effect on amplifying or weakening those impacts. The combination of both factors provides a more accurate forecasting model for predicting stock prices than the existing ones, which only consider historical stock prices.

Volume 14 Issue 5, May-2026

Pages : b202-b211