The Impacts of Individual Day Trading Strategies on Market Liquidity and Volatility: Evidence from the Taiwan Index Futures Market

Authors

  • Robin K. Chou,

    1. Robin K. Chou is a Professor of Finance and Risk and Insurance Research Center, College of Commerce, National Chengchi University, Taipei, Taiwan
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  • George H. K. Wang,

    1. George H. K. Wang is a Research Professor of Finance, School of Management, George Mason University, Fairfax, Virginia
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  • Yun-Yi Wang

    Corresponding author
    1. Yun-Yi Wang is an Associate Professor of Finance, Feng Chia University, Taichung, Taiwan
    • Correspondence author, Department of Finance, Feng Chia University, 100 Wenhwa Rd., Taichung, Taiwan. Tel: +886-4-24517250 ext. 4175, Fax: +886-4-24513796, e-mail: yyiwang@fcu.edu.tw

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  • We wish to thank Ji-Chai Lin, Alexander Ljungqvist, and the seminar participants at the 25th Australasian Banking and Finance Conference, the 2012 FMA Annual Meeting, 2nd International Conference on Futures and Derivative Markets, Feng Chia University, National Chengchi University, and National Chi Nan University and University of Sydney for helpful comments and suggestions.

Abstract

We investigate the investment strategies of individual day traders in the Taiwan Index Futures market, along with their impact on market liquidity and volatility. Our results indicate a tendency among most individual day traders to behave as irrational contrarian traders. We also present consistent evidence to show that most individual day traders provide market liquidity by reducing the bid-ask spread, temporary price volatility, and the temporal price impacts. Our results, which are consistent with the experimental results of Bloomfield, O'Hara, and Saar (2009) [Review of Financial Studies, 22:2275–2302], provide no support for the general criticism that day trading destabilizes the market while also exacerbating market volatility. © 2014 Wiley Periodicals, Inc. Jrl Fut Mark 35:399–425, 2015

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