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The Impact of Day‐Trading on Volatility and Liquidity *
Author(s) -
Chung Jay M.,
Choe Hyuk,
Kho BongChan
Publication year - 2009
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 1226-1165
DOI - 10.1111/j.2041-6156.2009.tb00014.x
Subject(s) - contrarian , names of the days of the week , volatility (finance) , market liquidity , monetary economics , economics , financial economics , econometrics , stock (firearms) , business , mechanical engineering , linguistics , philosophy , engineering
We examine day‐trading activities for 540 stocks traded on the Korea Stock Exchange using transactions data for the period from 1999 to 2000. Our cross‐sectional analysis reveals that day‐traders prefer lower‐priced, more liquid, and more volatile stocks. By estimating various bivariate VAR models using minute‐by‐minute data, we find that greater day‐trading activity leads to greater return volatility and that the impact of a day‐trading shock dissipates gradually within an hour. Past return volatility also positively affects future day‐trading activity. We also find that past day‐trading activity negatively affects bid‐ask spreads, and past bid‐ask spreads negatively affect future day‐trading activity. Finally, we find that day‐traders use short‐term contrarian strategies and their order imbalance affects future returns positively. This result is consistent with a cyclical behavior of day‐traders who concentrate their buy or sell trades at the bottom or peak of the short‐term price cycles, respectively.