Interaction of Investor Trades and Market Volatility: Evidence from the Tokyo Stock Exchange

33 Pages Posted: 7 Aug 2007  

Kee-Hong Bae

York University - Schulich School of Business

Takeshi Yamada

Australian National University (ANU)

Keiichi Ito

Nomura Holdings, Inc. (NHI) - Nomura Securities Co., Ltd.

Date Written: December 2006

Abstract

This paper examines the relation between market volatility and investor trades by identifying who supplies and demands market liquidity on the Tokyo Stock Exchange. Because the different trading patterns of various investor types such as individual investors, institutional investors, and foreign investors affect market liquidity differently, we find that market volatility fluctuates significantly depending on which investor types participate in trade. We show that market volatility increases by more than 50% from the average level when there are greater buy trades by momentum investors that demand liquidity and at the same time there are less sell trades by contrarian (or profit-taking) investors that supply liquidity. On the other hand, volatility dampens by more than 57% from the average level when there are greater sell trades by profit-taking investors, mostly by domestic investors, supplying liquidity while there are less momentum buy trades that demand liquidity.

Keywords: market liquidity, volatility, momentum traders, contrarian traders, trading volume

JEL Classification: G10, G12

Suggested Citation

Bae, Kee-Hong and Yamada, Takeshi and Ito, Keiichi, Interaction of Investor Trades and Market Volatility: Evidence from the Tokyo Stock Exchange (December 2006). Available at SSRN: https://ssrn.com/abstract=1004967 or http://dx.doi.org/10.2139/ssrn.1004967

Kee-Hong Bae

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Takeshi Yamada (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Keiichi Ito

Nomura Holdings, Inc. (NHI) - Nomura Securities Co., Ltd. ( email )

Tokyo 100-8130
Japan

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