اثر متقابل معاملات سرمایه گذار و نوسانات بازار : شواهدی از بورس اوراق بهادار توکیو

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.

This paper investigates the relation between equity market volatility and the trade interactions of different investor types such as individual investors, institutional investors, and foreign investors. In essence, we look into the relation between volatility and investor trades by identifying who supply and demand liquidity in the equity market. Our paper shows that the interactions of buy and sell trades among various investor types matter because trading patterns of various investor types affect market liquidity differently. We use weekly trading volume data from the Tokyo Stock Exchange (TSE) as they are among the few data that record both buy and sell volumes of various investor types for the entire equity market. Our paper connects the growing empirical literature that examines trading patterns of various investor types to the literature on the volatility of equity returns. Recent empirical studies have found that different investor types follow different trading patterns. In particular, many studies have reported that individual investors trade in a contrarian fashion in various equity markets. Using data of individual investors that trade using a major U.S. discount broker, Odean, 1998 and Odean, 1999 found that individual investors tend to cash in on winners and hold onto losers. Shefrin and Statman (1985) labeled such behavior as “disposition effect,” which is consistent with a contrarian trading pattern as investors profit-take more aggressively by selling stocks. Grinblatt and Keloharju, 2000 and Grinblatt and Keloharju, 2001), using Finnish data, found that sell trades of individual investors are more sensitive than buy trades to high past returns and that these investors demonstrate strong profit-taking behavior. Several empirical studies have similarly found contrarian trading patterns for individual investors in other equity markets; Choe, Kho, and Stulz (1999) in the Korean market and Richards (2005) in six Asian emerging markets. Also, Karolyi (2002) and Kamesaka, Nofsinger, and Kawakita (2003) have reported that net buy trades of Japanese individual investors follow contrarian trading patterns. Our paper finds that the contrarian trading pattern of Japanese individual investors is mainly driven by the profit-taking pattern of sell trades. Existing empirical studies find rather mixed results for the trading patterns of institutional investors in different markets. For U.S. institutional investors, Griffin, Harris, and Topaloglu (2003), Cai and Zheng (2004), Lakonishok, Shleifer, and Vishny (1992), and Nofsinger and Sias (1999), among others, reported results that they follow momentum trading patterns. In Finland, Grinblatt and Keloharju, 2000 and Grinblatt and Keloharju, 2001 found that institutional investors show contrarian trading patterns. Karolyi (2002) and Kamesaka, Nofsinger, and Kawakita (2003) also found Japanese institutional investors follow contrarian trades, which contrasts with the momentum patterns of U.S. institutions. Compared with the mixed empirical results for institutional investors, most studies found foreign investors follow momentum trading patterns in various markets (Brennan and Cao, 1997, Choe et al., 1999, Froot et al., 2001, Grinblatt and Keloharju, 2000, Grinblatt and Keloharju, 2001 and Richards, 2005). Brennan and Cao (1997) provide an information based explanation of momentum trading pattern of foreign investors. If foreign investors are less informed and do not have as much private information as local investors, foreign investors need to gather more information from market prices. Therefore, when prices of local equities rise, foreign investors tend to buy more, which generate momentum trading patterns. When various types of investors trade with each other, we are interested in how their different trading styles affect market prices and/or volatility. Because momentum traders demand liquidity as price increases, their trading styles might lead to further increases in prices or greater volatility. De Long, Shleifer, Summers, and Waldman (1990a) have suggested that momentum or positive feedback traders destabilize the market. Their results hold if other investors in the market do not provide liquidity to the momentum traders. If momentum investors trade against contrarian investors, we conjecture market volatility would be dampened because contrarian investors would be providing liquidity to momentum investors. Although there are many studies that document the different trading patterns of various investor types, few empirical studies examine their implications on market prices. Among the few are recent studies by Avramov, Chordia, and Goyal (2006) and Kaniel, Saar, and Titman (in press). By decomposing sell trades into contrarian and herding (or momentum) trades, Avramov, Chordia, and Goyal (2006) found that contrarian sell trades decrease volatility of daily individual stocks while herding sell trades increase volatility. The authors provide an information-based explanation suggesting that contrarian trades are informed trades that stabilize prices while herding is driven by uninformed investors that increase volatility. Kaniel, Saar, and Titman (in press) focused on the contrarian trading pattern of individual investors that provide liquidity for institutional investors in the US equity market. The authors have found that net buy trades of individual investors predict stock returns because individual investors, subsequently to their trades, earn excess returns as a reward for providing liquidity to institutional traders. Similarly, our paper focuses on the demand and supply of liquidity among different investor types. In particular, we study the impact of trade interactions between momentum and contrarian traders on market volatility. Numerous studies in the past have studied the correlation between volatility and investor trades by examining the volatility–volume relation (for a survey, see Karpoff, 1987). However, most volatility–volume studies have not paid much attention to the heterogeneous behavior of investor trades. Few empirical studies have examined whether the trading volumes of different investors have different impacts on volatility. Among the few, Daigler and Wiley (1999) examined the volatility–volume relation in the futures market and found that volatility is more sensitive to the trades of individual speculators and small hedgers rather than to the trades of floor traders. Because individual speculators and small hedgers have disadvantage in obtaining information about trading activities in the futures trading pit, Daigler and Wiley suggested that these investor types have more disagreements about order flow information, which increase volatility. Bessembinder and Seguin (1993) showed that market depth in the futures market, which could be measured by the unexpected changes in open interest, adds information to the volatility–volume relation. Because different investor classes such as hedgers and speculators manage their open interests in ways that affect market liquidity differently, Bessembinder and Seguin hinted that the types of traders involved affect the volatility–volume relation. Our paper also provides empirical evidence that trading patterns of different investor types explain volatility that might not be captured by the volatility–volume relation. As our data comprise of both buy and sell trades of various investor types, we are able to identify the potential demand and supply of liquidity that originate from different investor types. Our paper examines the relation between volatility and trading of different investor types in two stages. In the first stage, we empirically identify the patterns of trades of various investor types by examining the buy and sell trades of individual investors, various institutional investors, and foreign investors that trade on the TSE. We examine if the trades follow momentum or contrarian patterns in response to market returns. After identifying the trading patterns of various investor types, we classify investor trades into those that demand liquidity (momentum trades) and supply liquidity (contrarian trades) for both buy and sell trades of each investor type. In the second stage of our analysis, we calculate the buy market participation ratio (i.e., the buy trading volume of each investor type divided by the total buy trading volume) and sell market participation ratio (i.e., the sell trading volume of each investor type divided by the total sell trading volume) of each investor type. When there are high market participations of momentum buyers and low participations of liquidity supplying (or contrarian) sellers, we define these periods as having tight liquidity. We define periods of loose liquidity when there are low market participations of momentum buyers and high participations of liquidity supplying sellers. By using market participation ratios, we identify the states of tight and loose market liquidity and compare the levels of market volatility in these states. Our results suggest that trade interactions of momentum and contrarian investors influence market liquidity and impact market volatility. On the TSE, we find that sell trades of domestic investors, both individual and institutional investors, are important suppliers of market liquidity as they show strong profit-taking behavior, which suggests that behavioral biases of domestic investors are important drivers for the supply of liquidity on the TSE. On the other hand, the buy trades of foreign investors and domestic individual investors are among the major sources of liquidity demand as they show momentum trading patterns. We find unusually high volatility when market liquidity is expected to be very tight, which is when all momentum investor types buy intensively while all liquidity-supplying (or contrarian type) sellers participate less. We find that market volatility increases by more than 52% in the mean and 72% in the median from the overall sample during very tight liquidity. On the other hand, we find unusually low volatility when momentum investor types participate less but liquidity-supplying traders sell intensively. We find that market volatility dampens by more than 57% in the mean and 49% in the median during these periods. We separately examine if the trades of nonprofessional investors, such as individual investors, might increase market volatility as these investors are less sophisticated investors as suggested by De Long, Shleifer, Summers and Waldmann (1990b). We find that market participations of nonprofessional investors do not always increase market volatility as our findings suggest that sell trades of nonprofessional investors tend to increase market liquidity. The remainder of this paper is organized as follows. Section 2 describes the data and provides descriptive statistics of trades by different investor types. Section 3 examines the patterns of both buy and sell trades of different investor types and their response to market returns. Following this result, Section 4 explores how the buy and sell interactions of momentum and contrarian trades affect market volatility. Section 5 concludes the paper.