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

See all articles by Jay Chung

Jay Chung

University of Seoul

Hyuk Choe

Seoul National University - College of Business Administration

Bong-Chan Kho

Seoul National University, Business School

Date Written: July 30, 2008

Abstract

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

Chung, Jay and Choe, Hyuk and Kho, Bong-Chan, The Impact of Day-Trading on Volatility and Liquidity (July 30, 2008). Asia-Pacific Journal of Financial Studies, Vol. 38, No. 2, pp. 237-275, 2009, Available at SSRN: https://ssrn.com/abstract=1855759 or http://dx.doi.org/10.2139/ssrn.1855759

Jay Chung

University of Seoul ( email )

Seoul
Korea, Republic of (South Korea)

Hyuk Choe

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)
822-880 8257 (Phone)
822-882 0547 (Fax)

Bong-Chan Kho (Contact Author)

Seoul National University, Business School ( email )

607 LG Hall
1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
+82-2-880-8798 (Phone)
+82-2-876-8411 (Fax)

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