The Impact of Day-Trading on Volatility and Liquidity
Asia-Pacific Journal of Financial Studies, Vol. 38, No. 2, pp. 237-275, 2009
43 Pages Posted: 31 May 2011
Date Written: July 30, 2008
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.
Keywords: Day-Trading, Volatility, Liquidity, VAR, Contrarian, Momentum, Impulse Response
JEL Classification: G10, G11, L11
Suggested Citation: Suggested Citation