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Interaction of investor trades and market volatility: Evidence from the Tokyo Stock Exchange

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  • Bae, Kee-Hong
  • Yamada, Takeshi
  • Ito, Keiichi

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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  • Bae, Kee-Hong & Yamada, Takeshi & Ito, Keiichi, 2008. "Interaction of investor trades and market volatility: Evidence from the Tokyo Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 16(4), pages 370-388, September.
    • Handle: RePEc:eee:pacfin:v:16:y:2008:i:4:p:370-388
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    2. Walid M.A. Ahmed, 2016. "Cross-border equity flows and market volatility: the case of Qatar Exchange," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 11(3), pages 395-418, July.
    3. Ros Zam Zam Sapian & Jing Quan Lee, 2018. "Return, Volatility and Equity Fund Flows Linkages: Evidence from an Emerging Market," International Journal of Academic Research in Business and Social Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Business and Social Sciences, vol. 8(7), pages 172-186, July.
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    5. Hood, Matthew & Kamesaka, Akiko & Nofsinger, John & Tamura, Teruyuki, 2013. "Investor response to a natural disaster: Evidence from Japan's 2011 earthquake," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 240-252.
    6. Umutlu, Mehmet & Shackleton, Mark B., 2015. "Stock-return volatility and daily equity trading by investor groups in Korea," Pacific-Basin Finance Journal, Elsevier, vol. 34(C), pages 43-70.
    7. Lee, Bong Soo & Li, Wei & Wang, Steven Shuye, 2010. "The dynamics of individual and institutional trading on the Shanghai Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 18(1), pages 116-137, January.
    8. Huszár, Zsuzsa R. & Prado, Melissa Porras, 2019. "An analysis of over-the-counter and centralized stock lending markets," Journal of Financial Markets, Elsevier, vol. 43(C), pages 31-53.
    9. KIMURA Yosuke, 2017. "Heterogeneous Investor Behaviors and Market Volatility in the Tokyo Stock Exchange," Discussion papers 17003, Research Institute of Economy, Trade and Industry (RIETI).
    10. Chang, Yuk Ying & Faff, Robert & Hwang, Chuan-Yang, 2010. "Liquidity and stock returns in Japan: New evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(1), pages 90-115, January.
    11. Ahmed, Walid M.A., 2017. "The impact of foreign equity flows on market volatility during politically tranquil and turbulent times: The Egyptian experience," Research in International Business and Finance, Elsevier, vol. 40(C), pages 61-77.
    12. Paramita Mukherjee & Malabika Roy, 2011. "The Nature and Determinants of Investments by Institutional Investors in the Indian Stock Market," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 10(3), pages 253-283, December.
    13. Yue Meinn GOH & Ros Zam Zam SAPIAN, 2017. "Return, Volatility And Fund Flows Linkages: Malaysian Evidence," Management and Marketing Journal, University of Craiova, Faculty of Economics and Business Administration, vol. 0(2), pages 59-69, November.
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