33 Pages Posted: 7 Aug 2007
Date Written: December 2006
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: 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
By Richard Sias