Interaction of investor trades and market volatility: Evidence from the Tokyo Stock Exchange |
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| Affiliation: | 1. Lerner College of Business & Economics, University of Delaware, Newark, DE 19716, USA;2. Korea University Business School, Korea University, 145 Anam-Ro, Seongbuk-Gu, Seoul 136-701, South Korea;3. KAIST College of Business, Korea Advanced Institute of Science and Technology, 85 Hoegi-Ro, Dongdaemoon-Gu, Seoul 130-722, South Korea;1. College of Management and Economics, Tianjin University, Tianjin, 300072, China;2. China Center for Social Computing and Analytics, Tianjin 300072, China;3. Postdoctoral Programme, Guosen Securities, Shenzhen, 518001, China;1. Department of Economics and Finance, Lamar University, Beaumont, TX 77710, United States;2. ZhiDao Financial Services Co., Ltd., Shenzhen, China;3. Department of Economics & Finance, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, United States |
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| 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 there are less sell trades by contrarian (or profit-taking) investors that supply liquidity. On the other hand, volatility dampens by more than 57% when there are greater sell trades by profit-taking investors, mostly by domestic investors, while there are less momentum buy trades. |
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